Nov. 30 (Bloomberg) -- One by one, congressional Republicans are revoking their no-tax-increase pledges, opening the door to a fiscal-cliff compromise. Sadly, Democrats are just as quickly closing the door by calling for tax increases now and entitlement cuts later, if at all.
Democrats have good reasons (or so they think), beginning with their interpretation of U.S. President Barack Obama’s Nov. 6 victory as a mandate to raise tax rates on the wealthy while protecting the social contract. Also, liberal groups are making political trouble for Democrats by inciting seniors to oppose any and all cuts to Medicare and Social Security.
But if Democrats refuse to control entitlements, there will be no fiscal-cliff deal. Obama can put a quick end to this bickering. Instead of staging campaign-style events around the country to build public support for the hands-off-entitlements strategy, the president should tell voters the truth: The only way to avoid the more than $600 billion in spending cuts and tax increases scheduled for January is for both sides to make political sacrifices in equal measure -- tax increases from Republicans and entitlement cuts from Democrats.
The president should say that, unless changes are adopted soon, providing health care to an aging baby-boom generation will erode national finances for decades. These simple facts explain it well: Today, 47 cents of every dollar the government spends (excluding interest on the debt) goes to entitlements. By 2030, that number will jump to 61 cents. In 1962, it was a mere 14 cents. And Obama should explain that most of us take out far more from Medicare than we put in. The average two-income couple, for example, pays $119,000 into the program and gets back $357,000 in benefits.
Obama knows the ropes. In deficit-reduction talks in the summer of 2011, he tentatively agreed with House Speaker John Boehner to reform Medicare and Social Security. He should put those proposals back on the table.
A good starting point would involve asking those able to afford it to pay more for Medicare benefits. Only 5 percent of seniors -- those with annual incomes of more than $85,000 and married couples with incomes of more than $170,000 -- now pay premiums for doctors’ services and prescription drugs that increase with earnings. More aggressive means-testing to include 25 percent of seniors seems fair. And this would discourage Medicare recipients from overusing the health system. The 10-year savings would be about $350 billion.
Obama should also renew his tentative agreement to gradually increase the Medicare eligibility age. Raising it to 67 by 2027 to match Social Security would save about $148 billion over 10 years. If eligibility for both programs was pushed to 69, then pegged to increases in longevity, the savings would balloon to $249 billion. (Some of that would be offset by spending increases elsewhere, as low-income seniors would shift to Medicaid or seek support through new health exchanges.)
Before his 2011 talks with the speaker collapsed, the president also agreed to change the formula for calculating Social Security cost-of-living increases. The current formula, which doesn’t account for the product substitutions most consumers make to save money on their grocery bills, is overly generous. Switching the formula to more closely reflect reality would save $145 billion over a decade.
The president’s own budget, moreover, contains a grab bag of ideas for controlling health-care costs. Pharmaceutical manufacturers could be required to give Medicare the same rebates that Medicaid prescription-drug purchases receive. According to the Congressional Budget Office, this would save $137 billion.
These adjustments needn’t happen all at once. It would be wise to phase them in to give people approaching retirement time to adjust and to avoid withdrawing too much government spending while the economy remains fragile. As Larry Summers, Obama’s former chief economic adviser, told Bloomberg TV this week, “Crash diets aren’t the best way to lose weight.”
When fully in place, these changes could save close to $1 trillion over 10 years. And there are many other ways to trim payments to doctors, hospitals, home-health companies and other providers. The only question is this: If Obama was willing to adopt these reforms last year, why not now?
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