Entitlements Can't Survive Unless They're Reformed

Liberals hate declaring victory, because "crisis" is the lifeblood of activist government. But when it comes to poverty among the elderly, they really should take a bow.

In 1965, about 30% of seniors lived in poverty. By 2000, that number had fallen to 10%, a two-thirds decline. By 2009, the poverty rate for seniors had risen somewhat (thanks to the recession and financial crisis), but it's still half the poverty rate for children, and about 20% less than for adults 18-64.

This makes sense: We accumulate education, wealth and property as we age. For that reason, seniors have much higher net wealth than their younger counterparts. But while entitlement programs have undoubtedly helped alleviate poverty among the elderly, they are unsustainable as currently structured.

This is because current tax revenues (from working Americans) pay for today's retirees, and far fewer working Americans exist relative to retirees than in the old days. In 1950 nearly 17 people worked for every Social Security recipient. In 2009 the number was three. In 2040 it'll be two.

We're also collecting benefits much longer than originally anticipated.

Life expectancy for seniors in 1965 was just under 70 years. Now it's close to 80, meaning that instead of paying for five years of Medicare benefits, Americans pay for 15.

Baby boomers retiring today will receive far more in Medicare benefits than they ever paid in taxes.

Researchers at the Urban Institute project that a married 66-year-old couple paid $110,000 in Medicare taxes, but will receive about $340,000 worth of benefits.

Tinkering Won't Work

President Obama's plan for budget reform is to freeze these entitlement programs in their current arrangements and tinker at the margins—through, for instance, giving more power to Medicare's Independent Payment Advisory Board or applying price controls to drugs sold through Medicare.

Along with higher taxes for high earners (families making $250,000 and up) and defense cuts, Obama's deficit-reduction plan offers little innovation.

If Obama's plan prevails, and these programs aren't fundamentally reformed, poor and elderly Americans who depend on these programs will likely face much larger cuts in the future.

Republican Congressman Paul Ryan's budget improvement isn't perfect, either.

As my colleague Josh Barro notes, the Ryan and Obama deficit-reduction proposals contain some optimistic assumptions about how quickly Medicare costs can be contained.

Ryan should adjust his assumptions about how quickly the premiums should grow to make his projections more realistic.

In the meantime, his proposed premium-support system—in which seniors choose among competing insurance companies—would provide additional help to the poor and sick.

Ryan could also use additional tools to help contain costs. For instance, under Medicare's open-ended payment system, seniors can see any doctor they want, and Medicare pays the bill, no questions asked. As a result, Medicare encourages billions in waste, fraud and abuse.

Ryan could let private insurers reward seniors (through waived co-pays or even cash rebates) who used more low-cost, high-quality physicians and hospitals or participated in disease-management and wellness programs.

For Medicaid, Ryan would end the perverse system whereby the more a state spends, the more federal dollars it accrues.

State-Level Action

In today's system, wealthier states like New York that spend more and offer more generous benefits get far more federal aid than poorer states, like Louisiana. Block grants (especially if adjusted for poverty rates and fluctuating economic conditions) would force states to make more cost-effective use of medical dollars.

Liberals fear that this would encourage a "race to the bottom," but the same charge was leveled against welfare reform in 1996, and it didn't happen.

Conservatives can also counter this charge by noting that Medicaid already pays much less for physicians and hospital visits than Medicare or private insurance, and poor Medicaid recipients get much worse care as a result.

Medicaid offers the worst of both worlds: high costs and poor care. Ryan's plan would at least give states the flexibility to target funds at the highest-need populations.

Saving Medicare for future generations should include making seniors more active participants in choosing among more cost-effective insurance and health care options. Longer lives should be matched by increased incentives to save for health care and retirement.

Our definition of retirement should also change to adapt to a world where we can expect to work well into our 60s and even 70s.

Obama said last week that "for much of the last century, our nation found a way to afford those investments and priorities with the taxes paid by its citizens."

This is only half true: We could afford those commitments because we had a different society, facing different challenges. The challenges of a new century will require fresh solutions.

This piece originally appeared in Investor's Business Daily

This piece originally appeared in Investor's Business Daily