The Blahous dust up

Jonathan Bernstein with a post decrying the poor job the WaPo Ombudsman did in describing the controversy around the piece put out last week by Charles Blahous that said the ACA will increase the deficit (contro to CBO’s longstanding estimates). I was with my family in a car heading South on I-95 reading about the unfolding controversy on twitter last week, and so I didn’t post on it. However, even now, it is mostly being described as a dust up over double counting (how can something help the deficit and Medicare). Jonathan Chait has a good piece debunking this claim, Kevin Drum has a nice illustration of why this is not a valid claim, and Josh Barro adds a bit more on how this interpretation undermines one of the conservative charges leveled against the President. This is an old argument, rehashed.

The primary issue with the Blahous study is his development of a new baseline against which to compare the ACA. As I tweeted last Tuesday as we sped to vacation wonderland (I wasn’t driving)

(Here are Avik’s posts including Chuck’s guest post response: here and here).

The baseline used by Chuck Blahous essentially says that when tax inflows are no longer large enough to pay for Medicare outlays, then they will be cut to equal tax inflows; this is what is set to happen by law, but then again so are the cuts to Part B payments under the SGR. The baseline he used in this study to estimate the ACA’s impact on the deficit essentially says, Voila! There are no long term financing problem with Medicare after all, we will just fix them when we have to do so, using some sort of secret plan to cut Medicare spending (he seems to have backed off this later, but if so, the ‘stop the presses’ aspect of the paper is gone). As compared to this (very large, hypothetical) cut in Medicare expenditures cooked into the baseline used by Blahous in his study, the ACA would increase the deficit. That is a bit like me saying if I was a faster runner, I could be a professional marathoner. My point is that the main action in this study is comparing the ACA to a baseline that is unrealistic, not double counting.

Now what I would really like to read would be Chuck Blahous’ thoughts on what type of health reform strategies that we should undertake, especially ones that could do away with the long term financing problems faced by the program. I mean that sincerely because he is a great analyst with lots of experience, this just wasn’t his best.

update: edited for clarity.

Interview with Charles Blahous-part 3

Part 3 of my interview with Charles Blahous focusing on Medicare. Here is part 1 (General); and part 2 (Social Security).

Charles Blahous, one of the two public trustees for Social Security & Medicare, is a research fellow at the Hoover Institution, and was the Deputy Director for the National Economic council from 2007-09, and served as a Special Assistant to the President for economic issues from 2001-07. He is the author of Social Security: The Unfinished Work (2010: Hoover Institution).

Below are the questions I submitted to Dr. Blahous, and his answers.

  • What is the relative impact of demography as compared to cost inflation in explaining Medicares’ financing problems?

Pre-2035, demography is the bigger factor.  Ultimately health cost inflation would become the larger factor.  This in my view is hugely misunderstood.  Yes, health cost inflation is a huge issue, but it’s a harder factor to predict, and it doesn’t actually become Medicare’s biggest problem for some time.  We first have to come to grips with the number of years for which individuals receive support under Medicare.

  • What are the benefits and negatives of Medicare being financed by payroll taxes and general fund revenues?

The big negative is a lack of a transparency.  We just put out a report and the big headline was, “Medicare insolvent in 2024.” Well, that doesn’t tell much of the story, given that this describes Medicare Part A only, and Parts B and D never go insolvent by statutory construction.   The Medicare cost problem is manifested primarily through pressure on the general budget, an issue that is really obscured by part of its having a separate payroll tax structure and trust fund insolvency projection a la Social Security.  These different pieces of the puzzle don’t go together very well.  General revenue financing is what you adopt when you mostly want upper-income people to pay for something; a separate payroll tax is what you adopt if you place a higher priority on all program participants funding their own benefits.  These two are mixed together in current Medicare without much rhyme or reason.

  • What are your views of the cost saving approach represented by the Independent Payment Advisory Board (IPAB)?

As a Trustee, I really can’t have a view.  If the law states that the IPAB will produce a certain amount of savings and that it will occur unless Congress acts to override it, then we have to assume those savings will materialize. But as a long-serving Senate staffer, I’m much more skeptical.  I can’t count the times that we have turned to mechanisms like this to produce savings in Medicare, only to have Congress override the savings when they begin to bite.  If we have the political will to cut spending, then cut it.  If we don’t have the political will, then IPAB doesn’t have much of a chance. The fact that IPAB was a product of a bill supported by one party while strongly opposed by the other makes its long-term prospects even weaker.

  • Do you think Medicare costs can be slowed to sustainable levels without addressing cost inflation in private health insurance?

Too often, Washington policy makers tend to act as though federal health spending is the passive victim of runaway cost growth in the private sector.  But most of the academic literature suggests that the opposite is true; you have Finkelstein’s research showing that expansion of federal health insurance benefits was a major factor in driving national health inflation, and you have Kotlikoff’s showing that the growth in government-provided benefits has generally fueled per-capita cost growth not only in the US but throughout all advanced economies.  So step one here has to be to constrain the growth of uncapped federal support.

  • If you could bring about one health policy change during this Congress, what would it be?

Are we talking about the realm of the possible, or am I king for a day?   Our societal priorities seem to center around providing support for the typical health care expenses of those in need, and on providing protection from catastrophic health care costs for everyone, so that the lottery of life doesn’t randomly target some among us for suffering, despair, and the poorhouse.  If we scaled back the full smorgasbord of federal health programs to providing basic catastrophic insurance for everyone, and provided means-based support for routine expenses, then the rest of us could cover our own routine expenses and it would cost us a whole lot less to do so.  But this Congress obviously isn’t going to do that.  I suppose that as a trustee, the one thing I’d wish for is that we not proceed with plans to spend hard-won Medicare savings on this new health entitlement.  If we really want a new health entitlement, it should be able to finance itself; we shouldn’t finance that with the same money that we are claiming will extend the solvency of Medicare.

Interview with Charles Blahous-part 2

Part 2 of my interview with Charles Blahous focusing on Social Security. Here is Part 1.

Charles Blahous, one of the two public trustees for Social Security & Medicare, is a research fellow at the Hoover Institution, and was the Deputy Director for the National Economic council from 2007-09, and served as a Special Assistant to the President for economic issues from 2001-07. He is the author of Social Security: The Unfinished Work (2010: Hoover Institution).

Below are the questions I submitted to Dr. Blahous, along with his answers.

  • What is the problem(s) facing Social Security?

In a nutshell, it’s program costs that rise faster than the underlying tax base. And that in turn is driven by the increasing numbers of beneficiaries, the increasing number of years that they draw benefits, the decline in the ratio of workers to collectors, and the rise in per-capita benefit levels resulting from various program amendments over the years.  All of this is manifested in annual program cash deficits that began last year and which will rise dramatically under current law through the 2030s.  The other main problem I see in Social Security is the collapse of the previous bipartisan consensus as to what constitutes sound program financing.  The last time we fixed Social Security in 1983, there was a shared bipartisan understanding that the resources to pay benefits came from incoming worker tax contributions. There was indeed a Trust Fund then, but its assets weren’t counted when the trustees calculated the program’s actuarial balance, because no one seriously considered the Trust Fund as a viable means of covering for tax shortfalls for extended periods of time.  But now you have many people who point to the Trust Fund as the reason why we don’t need to fix anything until it technically runs out in 2036.  It would be nice if life were that simple, but it’s not.  If it were, all we’d need to do would be to issue more bonds to the Trust Fund and call it a day.  But the Trust Fund simply represents the program’s claim on future economic resources; it doesn’t answer the far more important question of what resources we are going to tap to pay those benefits.  I write a lot about this in my book, Social Security: The Unfinished Work.  We really have two problems in Social Security: we have a substantive problem — how do we finance the benefits of the baby boomers — which completely dwarfs the problem faced in the last Social Security crisis of 1983.  But we have an additional political problem, which is that our large Trust Fund on paper makes the problem appear, at least to some eyes, less urgent.  When you have a bigger problem to solve but a lesser sense of urgency about solving it, that’s a prescription for trouble.

  • What is the Social Security Trust Fund?

Mechanically, it consists of special-issue Treasury bonds.  Whenever Social Security runs a surplus, the surplus is used to finance current federal spending, and in return for the money the General Fund issues bonds to Social Security.  Those bonds earn interest at market Treasury bond rates.  They can be called in when needed to pay benefits.  In sum, the Trust Fund represents Social Security’s authority and financing source for benefit payments whenever incoming tax revenue falls short of benefit obligations.  That authority is limited by the size of the past surpluses Social Security has run, times interest.  Last year in 2010, Social Security tax revenue began to fall short of its benefit payment obligations.  But it could still send out the full benefit checks because there was a positive balance in the Trust Fund.  The Trust Fund really tells you just one thing; how long you can keep sending out the checks. It doesn’t tell you whether existing benefit schedules are equitable, whether existing tax schedules are equitable, where the resources will come from to finance benefit payments, nor when the projected shortfall has grown larger than the political system is still willing to solve.  There’s a tendency to read more information into the Trust Fund balance than is actually there.

  • It looks to me from the Social Security Trustees’ Report that the disability portion of the Social Security program faces an earlier date at which benefits must equal taxes received. Do I have this right, or can monies from OASI (Old Age Survivor Income) cross subsidize the DI (Disability) program?

You have it right.  Legislation could be enacted to reallocate revenues from OASI to DI, but that requires action by Congress.  DI would be insolvent by 2018 under current projections.

  • Are there any technical questions that need to be answered to enable Social Security reform, or are all the questions simply political in nature?

Per my answer on the Social Security Trust Fund, I believe there are a lot of important technical questions.  Sometimes there’s too much of an attitude of, “Hey, this is a relatively easy problem to solve,” without fully recognizing that some of the consensus has broken down on what solving the problem really means.  Do we want first of all to “solve the problem” for 50 years, for 75 years, for 100 years, or so that the central tendency of projections is indefinite sustainability?  After the 1983 reforms, we had a host of bipartisan technical panels and advisory boards come forward to say, in effect:  “It’s not enough just to have a non-zero trust fund if program operations are swinging wildly from large surpluses to even larger deficits, so make sure you’re ultimately on a path of annual balance.”  But increasingly you have some policy advocates just ignoring that standard because they don’t want to meet it.  The Simpson-Bowles commission, rightly in my view, produced a plan that met both standards of maintaining the trust fund and ultimately reaching annual cash balances.  If you don’t observe both, you allow for solutions that are really based on nothing more than budget gimmicks.  So, yes, we need to nail down agreement on those technical questions first.

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The Interview concludes tomorrow with Medicare.

Interview with Charles Blahous

Charles Blahous, one of the two public trustees for Social Security & Medicare, has graciously agreed to answer some questions about the recent Social Security and Medicare Trustees’ reports and the reform of these vital programs. Dr. Blahous is a research fellow at the Hoover Institution, and was the Deputy Director for the National Economic council from 2007-09, and served as a Special Assistant to the President for economic issues from 2001-07. He is the author of Social Security: The Unfinished Work (2010: Hoover Institution).

The interview will be divided into three days as follows:

Below are the questions I submitted to Dr. Blahous, along with his answers.

  • What is the job description of a public trustee for Medicare and Social Security?

Our job is basically to vouch for the financial projections for the Medicare and Social Security programs.  The public trustee positions were created by the 1983 Social Security amendments, pursuant to furthering public confidence in the objectivity and integrity of the projections.  There are two; one Republican (that’s me), and one Democrat (Robert Reischauer).

  • Which is more urgent, Social Security reform, or Medicare reform? Why?

They’re both urgent.  There’s no clear answer; you could argue it either way.  If –and it’s a big “if” – the savings under the new health care law hold up forever, then Social Security faces the bigger long-term actuarial shortfall.  And Social Security’s Disability Insurance Trust Fund would go under before any portion of Medicare would.  So if you’re talking in terms of trust fund balances and the risk of benefit reductions, Social Security is the bigger problem.  But that’s partially an artifact of the fact that some parts of Medicare – like Parts B and D – never go insolvent by definition.  In terms of long-term cost growth and pressure on the unified federal budget, Medicare remains the bigger problem.  Speaking very subjectively, I tend to think that Social Security would benefit the most from prompt action, because we still have the opportunity there to confine any benefit changes to purely prospective ones.  With Medicare, we’re already in the soup of implementing changes that will have adverse spillover effects on beneficiaries.  Our window of opportunity to avoid that in Social Security is closing fast, so we should seize it while we can.

  • What is the value of long term projections like those made by CBO?

Well, as far as CBO is concerned, I’d say the value is qualitative; to show the broad parameters of where are heading under current law – specifically, unprecedented federal spending levels and structurally unsustainable finances.  But that’s a qualitative image; CBO would not claim quantitative accuracy over the very long run. The same is true for the trustees and Medicare.  We can present a long-term picture and show why it’s clearly unsustainable, but long-term health-care cost projections are inexact to say the least.  Where long-term projections are most valuable are for something like Social Security where there is a strong philosophical relationship between workers’ near-term contributions and their long-term benefits, and where the pertinent variables can be projected with far greater accuracy.  That’s why long-term Social Security projections have a pretty substantial history behind them, and a fairly impressive track record as well.

update: fixed a typo

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More from Charles Blahous on Social Security tomorrow.