by Mitt Romney
From a mathematical perspective, there are at least four ways one could repair Social Security. First, Congress and the president could raise the Social Security tax rate or apply it to a greater share of an individual’s earnings, or some combination of both. But as Social Security benefits are proportional to what an individual has paid into the system, raising taxes would also raise benefits and compound rather than solve the existing problem. Even if we were to decouple an individual’s Social Security benefits from their contributions—raising taxes to solve our entitlement crisis—we would be saddling the next generation with the very tax burden we are seeking to avoid.
Alternatively, we could gradually increase the retirement age. This does have a certain logic to it: The average American’s life expectancy has risen by more than ten years since Social Security was created. Increasing the retirement age by even one or two years would help get the system closer to sustainability. Because some people would be physically unable to work beyond today’s retirement age, the system would have to allow for exceptions, but most people I know in their sixties want to keep working; they’re simply happier when they do. I keep hearing that sixty is the new fifty—at least that’s what I’ve been telling myself for the last few years. Many older Americans are healthy, vital, and want to stay engaged in meaningful work. If we increased the retirement age, we would encourage seniors to stay healthier longer, keep their minds active and alert, and at the same time, we would relieve the terrible Social Security burden our children and grandchildren face.
I’ve also been intrigued by an option proposed by Bob Pozen, who served in my state cabinet in Massachusetts and is the former vice chairman of Fidelity Investments. He currently heads MFS, a Boston-based financial services company. His idea is to simply change the way high-income individuals’ initial Social Security benefit is calculated. At present, the initial benefit for all recipients is keyed to the total amount of their lifetime employment income and the Social Security taxes paid on it, adjusted to reflect the inflation that occurred up to the date of retirement. But the inflator that is used in the calculation isn’t the consumer price index (the CPI), as you might suspect, but rather the wage index. Because wages have gone up a good deal faster than consumer prices, the wage index raises the starting point for Social Security benefits faster than would have been the case had the CPI been used. The rationale for using the wage index was that people who rely on Social Security for most or all of their retirement need it to keep up with their current wages, not a lower figure based on the change in the cost of goods. The Pozen Plan proposes to continue to use the wage index as the inflator for low and middle-income citizens, but he now applies the CPI index to compute the initial benefits for higher-income individuals who are not living predominantly on Social Security benefits.
The Pozen Plan tends to sit better with conservatives than it does with liberals because, while the former don’t like anything that looks like a tax increase, the latter aren’t fond of anything that looks like a benefit reduction. To make the plan as palatable as possible to everyone, one could let high-income individuals make the choice themselves. If they wanted the higher wage index to be used to determine their initial benefit, then they would be charged a higher Social Security tax. If they preferred the CPI method, their tax would remain the same. Few would object to being offered a personal choice, and the active involvement of citizens in the calculation of their benefits would greatly enhance the understanding of the system as well as the trade-offs on which it is built.
When the United Kingdom faced a retirement-system crisis similar to our own, the British Parliament opted to switch to the CPI index inflator for all beneficiaries, not just those with higher incomes, and the country effectively solved its problem. Pozen’s graduated inflator plan wouldn’t solve our entire Social Security shortfall, but he calculates that it would remedy most of it. Together with a gradual increase in the retirement age, it would preserve the government’s ability to meet Social Security obligations without taking a rising share of wages, and it would be phased in over time so current and near retirees would not be affected in any way.
Individual retirement accounts offer a fourth option, one that would allow today’s wage earners to direct a portion of their Social Security tax to a private account rather than go entirely to pay the benefits of current retirees, as is the case today. The federal government would make up for its lost Social Security revenue by borrowing that amount through the sale of treasuries, just as it currently does for the rest of its deficits. Owners of these individual accounts would invest in a combination of stocks and bonds and—presuming these investments paid a higher rate of return than the new treasuries—the return on these investments would boost the payments to seniors. I also like the fact the individual retirement accounts would encourage more Americans to invest in the private sector that powers our economy.
The 2008 stock market collapse is proof, however, that we can’t always count on positive returns from these investments. But it is not, as some critics claim, proof of the folly and danger of individual accounts. It is evidence that such a system would have to be phased in over time so that the market’s inevitable ups and downs—by far more ups than downs over a lifetime—do not endanger a secure retirement. But given the volatility of investment values that we have just experienced, I would prefer that individual accounts were added to Social Security, not diverted from it, and that they were voluntary. Former commerce secretary Pete Peterson has proposed that such individual accounts be mandatory, pointing out that voluntary savings programs like 401(k)s and IRAs tend to be underutilized. But if the accounts were linked with Social Security, set at 1 percent of wages as the annual contribution, and required an annual opt-out by both the individual and his or her spouse to be inoperative, I believe they could be effective, while at the same time giving taxpayers personal choice.
One or a combination of these last three options will put Social Security on track to sustainably meet its obligations to current and future retirees, and they will keep us from raising taxes that would stifle our economy and encumber future generations.
On to Medicaid. When I was governor of Massachusetts, the Bush administration’s then secretary of health and human services Tommy Thompson proposed a straightforward and uncomplicated plan to fix the Medicaid program. Appearing at the annual governors’ conference, he proposed that each state annually be given the Medicaid dollars it had received during the prior year, adjusted for inflation and changes in the state’s population of the poor. The state would be allowed to fashion its health-care program for the poor as the state chose.
You might imagine that the fifty Republican and Democratic governors would have recoiled at the idea; after all, overall inflation rises far more slowly than does health-care inflation. In fact, however, the proposal was welcomed by many in both parties. A number of us had already filed requests at the Department of Health and Human Services for waivers that would allow us to adjust our states’ Medicaid program because, over the years, we had watched as its intent to care for the poor had been distorted by some very creative people.
Have you seen advertisements by lawyers claiming that with their help, the government will pay for nursing-home costs regardless of one’s assets? They have found ways to turn wealthy retirees into poor people—at least for the purposes of qualifying for Medicaid nursing-home care. Now millionaires can give their fortunes to their children, become poor, and qualify for Medicaid. And as a result, middle-income retirees see no need to purchase long-term care insurance. An operator of a chain of nursing homes said that twenty-five years ago, Medicaid paid the bills for about 20 percent of the people in their nursing homes, while 80 percent were covered by their own private insurance. Today those numbers have been reversed. If the government is willing to give away money, there will always be a long line to get it.
These distortions and inequities in Medicaid have become so severe that governors like me were willing to trade th
e federal government’s open checkbook for the ability to control our own state’s program. We were convinced that we could save money and provide better care for more people who really needed it. Yet Congress rejected Thompson’s plan. Since then, I haven’t seen a better idea for fixing Medicaid come so close to becoming law.
There are other cost-saving options for Medicaid as well. Recipients could be moved to managed care plans. A 2004 report from the Lewin Group found savings in the range of 6 to 12 percent could be achieved via this route. Or states could pay a standard fee for each covered individual to a primary care practice or community health center. This would provide cost certainty and better care for the poor.
Rather than allowing Medicaid members to go to any hospital, states could negotiate with fewer providers to obtain better rates. Or we might let Medicaid recipients opt out of the Medicaid program, give them an equivalent voucher, and allow them to purchase private insurance instead. The best way to see which of these or other ideas is most beneficial is to allow states to experiment, evaluate the results, and share them with the other states. Using the states as the laboratories the Constitution intended under our federal system is exactly what led us to meaningful and effective welfare reform in the 1990s. Such experimentation can lead us to the right result again. But Congress and the president must advocate for such a move and pass and implement it before such reforms can begin.
Returning Medicare to solid footing represents our greatest entitlement challenge. If we make no changes to the current system, payroll taxes would have to increase by 40 percent to meet our Social Security bill in 2040, but the increase to meet Medicare costs in two decades would be a staggering 250 percent.
Like Social Security, Medicare is currently being rocked by the swelling numbers of baby-boomer retirees. By the middle of this century, the number of people age sixty-five or older will more than double—to nearly 80 million people. That means that one of every four Americans will be over 65. Have you noticed how many seniors live in Florida? In 2050, the senior share of the entire U.S. population will be the same as it is for Florida today. Simple demographic math will drive up the Medicare load borne by every individual still in the workforce, just as it does for Social Security and Medicaid. There are now 3.3 workers for every retiree, but in forty years that ratio will drop to 2 workers for every retiree.
The rising cost of health care adds just as much to the weight to the Medicare burden as does the age wave. When I was a young consultant to a health-care company in the late 1970s, I predicted that health care would reach 20 percent of the GDP by 2050. At the time, health care made up 11 percent of the nation’s GDP, and my client scoffed at me, insisting that the economy couldn’t possibly accommodate that much spending on health. Something will have to give before that happens, he assured me. But, as it’s turned out, health care already accounts for nearly 18 percent of the economy. It won’t reach 20 percent in forty years, as I had projected, but in only eight. As health care costs outstrip the growth of the rest of the economy, it gobbles up a larger and larger share of the GDP. So it is health care itself that has to be brought under control if we are to keep our Medicare bills from overwhelming the next generation.
The debate over health care raged in Washington during most of 2009. Sadly, that consensus as to the problem did not result in a consensus as to the solution. The real tragedy was that it wasn’t the sort of bipartisan and genuine search for solutions that I experienced in Massachusetts in 2006 and 2007. Our reforms in Massachusetts didn’t produce a perfect system, just one that was much better than what had been there before, and it taught us all valuable lessons on how to work collaboratively to reform health care. But the most important lessons—involve everyone, demonize no one, and be transparent—were never adopted by President Obama, Speaker Nancy Pelosi, Senator Harry Reid, and their surrogates. As a result, we have not achieved the kind of reforms that will tame health-care cost inflation.
In addition to top-to-bottom health-care reform—which is the subject of the next chapter—there’s also a great deal that we must do to repair Medicare itself.
As noted above, Congress must set an explicit budget every year for Medicare; the mandatory-spending mind-set simply isn’t conducive to the kind of productivity improvement and cost reduction that we so critically need.
Second, we must begin to move Medicare away from the current fee-for-service reimbursement system. Today Medicare pays doctors, hospitals, and other providers for every procedure, test, exam, or treatment given to a particular patient—the more tests and exams, the more money the hospital or physician is paid by Medicare. And there is abundant evidence that financial incentives do in fact influence treatment decisions that health-care providers make. In Japan, for example, physicians can own pharmacies, and those who do make a small profit each time they prescribe drugs. American doctors are not allowed to own pharmacies, which, it turns out, is a good thing. Japanese doctors prescribe twice as many drugs per person as do American doctors. Japanese doctors are also paid a flat fee for each office visit made by a patient; the average patient visit in Japan lasts only five minutes, and physicians there typically insist on a patient visit before they will renew a prescription. I suspect very few Japanese doctors let their financial incentives define the quality of care they give their patients, but that’s one of the curious characteristics of financial incentives: Sometimes you aren’t even aware that they are bending you toward a particular kind of behavior.
When the Congressional Budget Office studied Medicare spending by state and region, it discovered that the annual average cost per Medicare enrollee was 5,200 in one region and 14,000 in another, even after adjusting for a variety of demographic factors. The study found no significant differences in mortality rates or health outcomes for Medicare patients across those regions, but one disparity really jumped out. In the highest cost areas, there were significantly more specialists relative to the number of primary-care physicians. The CBO study offered no conclusion, but it’s hard not to imagine that the Field of Dreams phenomenon applies: If you build it, they will come, particularly if Medicare is paying the bills.
Migrating Medicare away from fee-for-service can reduce the rate of Medicare-spending growth. Under one approach, a health-care provider is paid a fixed amount for each patient with a specific condition—eliminating incentives to perform multiple tests or redundant procedures. Another so-called capitated plan pays the provider a flat fee for every person in the entire pool of enrollees—offering the provider an incentive to keep his or her patients healthy. Despite its detractors who charge that managed care is second-rate, it’s actually preferred by large numbers of preretirement Americans as they choose the best way to meet their own health-insurance needs. In California, where managed care has been an option for many years, almost six million citizens are members of Kaiser Permanente’s managed-care program, the nation’s largest not-for-profit health organization, and it has consistently received top marks in reports by a variety of consumer surveys and consumer organizations.
Instituting an improved payment system will help solve the Medicare crisis, but to remain solvent over the long term, the system must undergo an even more fundamental alteration. When Medicare was created, it was envisioned as a plan to provide health care for the aged poor, but instead, it has grown into the nation’s retirement health plan for all seniors. This evolution is an accomplished fact, and it doesn’t matter whether it was a good or bad result, only that it is manifestly the result with which all of us must live and under which most of us must age. We need to make it work. As the baby-boom generation retires, the only way we can keep our children from being forced to pay our medical bills is for us to pay them ourselves—and a number of options would make that possible.
Medicare, for example, could offer each retiree a credit sufficient for a basic health plan, and individuals could opt to accept that plan or apply the credit toward a more comprehensive and higher-cost plan. Alternatively, co-payments, d
eductibles, and co-premiums could be adjusted upward for higher-income enrollees. As with Medicaid, there are many good ideas—we need to restart the process of arriving at a favorable mix of reforms, and soon. The bottom line is that there’s simply no way to prevent Medicare from consuming our children’s future if we baby boomers and our physicians can continue to order ever more expensive diagnostic procedures and treatments that we don’t have to pay for. Very few grandparents who I know would ever consider ordering an extraordinarily expensive medical treatment and putting it on their granddaughter’s charge card—at a high rate of interest—but that is exactly what we are doing, and it has to stop.
If health care is free to the patient and profitable for the provider, the only result can be runaway spending. And we need to acknowledge it’s a result that has already arrived. We must recognize that the system is seriously ill, and that ignoring this truth will lead to even more grave consequences in the years to come.
Mountains of Debt
Entitlements comprise far and away the largest liability on our national balance sheet. Current estimates peg those obligations at over 42.9 trillion—more than three times the size of the entire American economy. But they aren’t our sole liability; the debt we owe due to the federal government’s deficit spending reached 6.8 trillion in 2008, and the Congressional Budget Office projects that President Obama’s budget plans will add a staggering 9 trillion more in total deficits over the coming decade alone. During his first term, he plans to add more than a trillion dollars of debt each year. That amount is more than the total personal income taxes annually collected by the federal government. Under the Obama spending program, we will soon have accumulated more public debt than our entire GDP.
Consider the burden—or more aptly, the peril—associated with this debt. In 2009, the interest on the debt will consume more than 40 percent of our total individual income taxes! And that is with an average interest rate of 3.2 percent. Consider what would happen if lenders to the United States became worried about our ability to repay our debt and interest rates rose to Carter-era levels of 15 percent. In the words of Lawrence Kadish in The Wall Street Journal: Left unchecked, this destructive deficit-debt cycle will leave the White House and Congress with either having to default on the national debt or instruct the Treasury to run the printing presses into a policy of hyperinflation. The consequences of either outcome for America and American families would exceed those of the Great Depression.
