Return of the Granny Bashers

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Dean Baker
The Guardian Unlimited, May 5, 2008

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Opponents of social insurance programmes in the US fail to recognise that the real problem is the cost of healthcare.

Tens of millions of homeowners on the edge of retirement are seeing most of their life savings disappear in the housing crash. Fear not: the economic experts are on the job.

Last month a bipartisan group of prominent budget experts had a press event at the Brookings Institution where they argued that Congress had to make major cuts in Social Security, Medicare and Medicaid. They claimed large cuts in these programmes were necessary in order to prevent the explosion in the budget deficit that is projected if these programmes stay on their current course. This should provide encouragement to those who are now approaching retirement with nothing to rely on except Social Security and Medicare.

While there are long-term fiscal issues facing the country, the real problem is not the budget and these core social insurance programmes. The real problem is that the United States has a broken healthcare system, which is projected to get progressively more inefficient through time.

Since roughly half of the country's healthcare costs are paid by the government, primarily through Medicare and Medicaid, the projected explosion in healthcare costs is also projected to lead to an explosion in government spending. If the healthcare system is never fixed, the burden on the budget will eventually be unsustainable, with annual deficits running into the trillions of dollars, exactly as the Brookings contingent claimed.

However, it is crucial that the public recognise that the problem is healthcare costs, not a growing population of elderly. The two issues are easily confused, especially since most public sector healthcare costs go to provide healthcare for the elderly. The projected increase in the ratio of retirees to workers will impose a strain on the budget, but it will not be qualitatively different than the strain that aging has imposed in prior decades.

The country has always been aging - we are living longer - we can easily cover the cost of a growing population of retirees as long as the economy is healthy. With normal productivity and wage growth, our children and grandchildren will be able to support a larger population of retirees and still enjoy a much better standard of living than we do; just as most of us now enjoy a better standard of living than our grandparents, even though we support a much larger number of retirees than they did in their working years.

However, if healthcare costs follow the projected trajectory, then the cost of Medicare, Medicaid and other government healthcare programmes will be unsustainable. Of course, in this scenario the rising cost of healthcare will also place an enormous burden on the private sector.

Per capita healthcare costs in the United States are already more than twice as high as the average in other wealthy countries like Germany, England and Canada. In the budget projections, per person healthcare costs will be four or five times as high in the United States as in other countries by 2050. In this context, US firms will face an enormous competitive disadvantage if they pay for their workers healthcare costs.

If the companies don't pay for insurance, then most workers will face an enormous struggle paying for insurance costs that will be almost as high as the typical wage of a worker today. In either case, workers will have far less money to spend on food, housing education and other necessary expenses, if healthcare costs grow as projected.

No one in the Brookings contingent would dispute the basic facts; we are all looking at the same numbers. If healthcare costs in the United States were brought in line with costs in other wealthy countries, all of which enjoy longer life expectancies than we do, then we would not be looking at scary budget projections 20 or 30 years down the road.

This suggests the urgency of fixing the US healthcare system. Healthcare reform is not only necessary to extend coverage to the uninsured, it is also essential for preventing our healthcare system from strangling the economy. Reform will require overcoming the opposition of extremely powerful lobbies, such as the pharmaceutical and insurance industries, but there really is no alternative.

As the Brookings contingent said, the current path is unsustainable. And it is not acceptable to tell our parents and grandparents that they will just have to die because our healthcare system has made their care unaffordable.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.