What is entitlement reform

Consequently, a higher eligibility age would be one of the most regressive solutions available. Health-care spending is the most important and most conceptually complicated element of entitlement reform. The best way to understand the Medicare piece of entitlement reform is simply to read up on health-care spending and general health-care resources. The Center for American Progress's Social Security reform proposal is a good introduction to mainstream Democratic thinking about the issue, while former Social Security Deputy Commissioner Andrew Biggs, now at the American Enterprise Institute, regularly offers a right-of-center view on the issue.

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Please consider making a contribution to Vox today to help us keep our work free for all. Cookie banner We use cookies and other tracking technologies to improve your browsing experience on our site, show personalized content and targeted ads, analyze site traffic, and understand where our audiences come from. By choosing I Accept , you consent to our use of cookies and other tracking technologies. Reddit Pocket Flipboard Email. What is entitlement reform Entitlement reform is the idea that some of America's biggest and most popular non-military government programs — most notably Social Security and Medicare — should be changed so as to be less expensive in the future.

What are entitlement programs? Who wants to cut entitlement programs? Who is against cutting entitlement programs? Why is entitlement spending going up? What could we do to reduce entitlement spending? There are four main options. Reduce the number of people who are eligible for entitlement programs, most plausibly by raising the threshold for who counts as old enough.

Make benefits less generous to some of the people who are eligible. Make health care programs less generous to health care providers, by continuing to cover the same services but offering less money to the people who provide the services. Liberal proposals to have Medicare "negotiate" prices with pharmaceutical companies fit this model, as do various plans to tweak reimbursement rates.

Last and most appealing, we could do something to reduce structural cost growth in the American health care system through greater efficiency. Are entitlement cuts the same as austerity? Why do people want to reduce entitlement spending?

What are the main options for Social Security reform? The most common ones are: 1. Raise the retirement age. Change the inflation measurement used for cost-of-living increases to what's called the "Chained CPI.

Cut benefits for more affluent retirees known as "means testing". Raise taxes by subjecting a larger share of rich people's income to Social Security taxes.

Invest the Social Security Trust Fund into stocks and other investment options. Wholly or partially transition Social Security into a system of private accounts.

What are the main options for Medicare reform? But four big Medicare-specific ideas are frequently debated: Raise the age at which people become eligible for Medicare benefits. Reduce the prices that Medicare is willing to pay for medical services.

Transform Medicare from an open-ended commitment to seniors' health care into a voucher to defray the cost of private insurance. Reduce benefits for more affluent retirees known as "means testing".

What's chained CPI? Accessibility help Skip to navigation Skip to content Skip to footer. Choose your subscription. Trial Try full digital access and see why over 1 million readers subscribe to the FT. For 4 weeks receive unlimited Premium digital access to the FT's trusted, award-winning business news. Digital Be informed with the essential news and opinion.

Delivery to your home or office Monday to Saturday FT Weekend paper — a stimulating blend of news and lifestyle features ePaper access — the digital replica of the printed newspaper. Specifically, if policymakers focused benefits more on people with the lowest incomes by phasing out benefits more quickly as earnings increased, beneficiaries would face a higher implicit tax rate on extra work and might work less.

We also found that the change in labor supply in either direction would probably be small, because an extensive review we had conducted of research on the responsiveness of labor supply to tax rates showed that the responsiveness is generally low. In addition, when the demand for labor falls short of the potential supply, as it has throughout the past eight years, even people who want to work may not be able to do so.

Moreover, people with limited skills tend to have significant trouble finding work, even when overall labor demand is strong. And even if people did work enough more to maintain their total income after a benefit cut, the extra work would reduce their time for childcare, elder care, or other activities. This crowding out of activities by additional work would make people worse off, at least in simple models.

That leads to a second way in which the simple logic that benefit cuts hurt recipients might be wrong. Suppose that work makes people better off through channels they do not fully recognize.

Then, reducing government benefits and making people work more might be in their interest. For example, people may work too little because they underestimate the long-term value of building skills and climbing a job ladder. Or because they have trouble following through on their plans to find jobs. Or because they underestimate the importance of their working for the future work habits of their children.

I think those stories apply to some people. But evidence that those stories are quantitatively important for significant numbers of people is lacking. Meanwhile, there is a growing body of evidence that children in lower-income families that receive certain benefits do better in the labor market when they grow up than children in families that do not receive those benefits.

Researchers have shown that children in lower-income families that receive certain federally subsidized housing opportunities, health care, high-quality preschool education, and other benefits earn significantly more as adults. So, if we want children in lower-income families to have a stronger start in their lives, the evidence suggests that reducing benefits received by those families would be exactly the wrong policy to pursue.

I agree that cutting benefits might increase overall output and income in the long term, by reducing either budget deficits or taxes. For example, smaller deficits or lower tax rates might, over time, increase investment in business capital and thereby productivity and wages.

Indeed, at the end of a paper I wrote last fall advocating the use of dynamic scoring for major legislation, I advocated the use of dynamic distributional analysis, in which the macroeconomic effects of policy changes would be included in distributional analyses. So, I appreciate the logic of this argument. However, there is no reason to expect that pre-tax-and-benefit incomes of lower-income people would rise by enough to fully offset the lost benefits.

First, cutting benefits might actually decrease overall output and income by reducing investment in human capital—namely, the health and education of lower-income children. Second, even if overall income rose, lower-income people might not receive a significant share of that gain. And third, even if overall income rose and lower-income people received a proportional share, their gains would be smaller than their loss of benefits. A fourth line of counterargument is that the supposed failure of the War on Poverty shows that government benefits hurt lower-income people even if the precise mechanisms are unclear.

I think that assessment of the War on Poverty is not consistent with the evidence. Average earners who received the highest rate of return actually observed over a thirty-five year historical period would have earned more on their individual accounts and would have no cut in benefits relative to current law. All of the foregoing statements apply only to average single earners.

Table 5 shows the effects of the partial shift to individual accounts on married earners and on workers who have above- or below-average earnings. Married workers experience larger cuts in their combined benefits because their Social Security benefits—and hence their benefit cuts—are larger absolutely than those of single workers, yet their individual accounts will be the same.

Low earners experience larger cuts in their combined benefits because the Social Security benefit formula favors low earners while individual accounts do not.

Under the Bush plan, cuts in combined Social Security and individual account benefits for married, low-earners who receive lower-than-average returns on their individual accounts could approach 50 percent.

Despite claims in the Bush plan that the disabled, current retirees, and those near retirement would be spared all benefit cuts, it is difficult to believe that Congress—or, indeed, Mr. Bush on fuller consideration—would decide to cut retirement benefits for younger workers by 50 percent or even more and leave the disabled, older workers, and current retirees wholly insulated from benefit reductions.

I believe that few elected officials would think it fair to subject some Americans to large benefits cuts yet spare others from any cuts at all. Benefit cuts would be smaller than I have indicated if a plan transfers general revenues to the Social Security fund.

However, these projections misstate the budget situation for several reasons. First, as this committee knows well, this projection assumes that growth of discretionary spending will not exceed inflation. Neither party has shown a willingness to live within such tight constraints.

Neither Republicans nor Democrats, as groups, have recently shown a willingness to hold discretionary spending growth as low as the rate of inflation. Second, both parties have agreed that cash flow surpluses in Social Security should not be used to justify spending increases or tax cuts.

The logic is that these reserves and more will be needed to pay for future benefits. Yet the same logic applies to Medicare reserves and to balances accumulating in the Civil Service Retirement system, both of which are now counted toward the projected budget surpluses. Both should be removed.

Bush has proposed, as estimated by the Joint Committee on Taxation, plus added interest costs that would be generated by the tax cut. Martin Feldstein has argued that establishing individual accounts would boost national saving and that the corporate profits taxes generated by a larger capital stock could be transferred to Social Security to reduce the size of benefit cuts that would otherwise be necessary.

The claim that individual accounts would boost national saving is without foundation, however. If, on the other hand, large tax cuts are not enacted, the general fund is likely to generate some surpluses—although not as large as current CBO or OMB projections would lead one to think—and resources would be available to support general revenue transfers to Social Security.

General revenue transfers to Social Security do make sense. Early Social Security beneficiaries received benefits worth far more than the payroll taxes they and their employers paid. Money to pay these extra benefits came from the payroll tax collections of still-active workers. The period when cumulative benefits to new retirees will be worth more than the payroll taxes paid by them and their employers is coming to an end.

Current retirees and those who will retire in the future will, on the average, receive benefits worth no more than the taxes they have paid, cumulated at a modest real rate of return. Thus, Social Security will not be generating new unfunded liabilities for future retirees. Whether or not one thinks that the payment of comparatively generous benefits to early Social Security retirees was a good or a bad idea, that action cannot now be undone. The reserves not accumulated to support benefits of future retirees is an obligation that we must meet, one way or another.

The question is: who should meet it? Under current law, the cost of paying for this unfunded liability falls on workers, in proportion to their earnings. The rationale for this policy is difficult to comprehend. They will be receiving in benefits no more than they and their employers will be paying in taxes. The unfunded liability, like the national debt, should be recognized as a general obligation of the American people.