The Future of Social The Future of Social Security and Medical Security and Medical

Care in the U. S.Care in the U. S.

Robert J. Gordon,Robert J. Gordon,

OFCE, Paris, December 15, 2004OFCE, Paris, December 15, 2004

One is Simple and the One is Simple and the other is Difficultother is Difficult

Social Security is Simple in the U. S.Social Security is Simple in the U. S. Other Nations should envy our population growthOther Nations should envy our population growth Our official projections are incredibly pessimisticOur official projections are incredibly pessimistic The required “fixes” are very minorThe required “fixes” are very minor The political battle: are personal accounts worth the The political battle: are personal accounts worth the

transition cost?transition cost?

Medical care is complex and difficult, many Medical care is complex and difficult, many self-inflicted woundsself-inflicted wounds

Population Growth per Population Growth per annum, 2000-2004annum, 2000-2004

Population Growth

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0.6

0.8

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1.2

1

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ited

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Ca

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UK Japan Italy

Germany

Why Should the U. S. Why Should the U. S. Have a Problem?Have a Problem?

Not quite “pay as you go”Not quite “pay as you go” 1983 Reforms built up quite a head start on the 1983 Reforms built up quite a head start on the

baby boom problembaby boom problem 1983 reforms together with Reagan and Bush tax 1983 reforms together with Reagan and Bush tax

cuts => subtle exercise in class warfarecuts => subtle exercise in class warfare Will peak in 2012-15, then decline until zero in Will peak in 2012-15, then decline until zero in

~2045~2045 The “exhaustion date” depends on assumptions, The “exhaustion date” depends on assumptions,

particularlyparticularly Productivity growthProductivity growth Population growth (fertility, mortality, immigration)Population growth (fertility, mortality, immigration)

The Trust Fund: Peak The Trust Fund: Peak Date and Exhaustion Date and Exhaustion

DateDateOASI Trust Fund Ratio

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2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

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Present

Projected

With Optimistic With Optimistic Assumptions Assumptions there is no there is no

Exhaustion DateExhaustion Date

Caution on what Caution on what “Exhaustion” Means“Exhaustion” Means

After the trust fund is gone, revenues will After the trust fund is gone, revenues will still cover 81% of benefitsstill cover 81% of benefits

Increase in tax rate from 12 to 15 or 16 Increase in tax rate from 12 to 15 or 16 percent will keep system solvent foreverpercent will keep system solvent forever

These numbers must look very low to These numbers must look very low to French eyes!French eyes!

How the Assumptions How the Assumptions MatterMatter

Productivity:Productivity: Current system raises benefits by real wage Current system raises benefits by real wage

through retirement, then only inflationthrough retirement, then only inflation

Population growthPopulation growth Fertility = 2.0 (compare to Europe!)Fertility = 2.0 (compare to Europe!) Mortality ignores medicare effect (explain)Mortality ignores medicare effect (explain) Immigration!Immigration!

Will the population in 2080 be 415m or 600m??Will the population in 2080 be 415m or 600m??

Immigration: the Shining Immigration: the Shining LightLight

Immigration / Population ratio grew at 3.5 Immigration / Population ratio grew at 3.5 percent per year 1970-2002percent per year 1970-2002

Ratio currently at 1.4/300 = 0.46%Ratio currently at 1.4/300 = 0.46% Official projections based on constant 1.2 Official projections based on constant 1.2

million forever, so ratio declines to 0.29% by million forever, so ratio declines to 0.29% by 20802080

Allowing ratio to taper off to a constant 0.5% Allowing ratio to taper off to a constant 0.5% implies 2080 population of 600 million, not 415implies 2080 population of 600 million, not 415

Implies permanent population growth of 1.0%, Implies permanent population growth of 1.0%, not 0.2%not 0.2%

Solutions are EasySolutions are Easy

Faster Productivity Growth puts off crisisFaster Productivity Growth puts off crisis Faster population growth puts off crisisFaster population growth puts off crisis How to solve crisis, whenever it comesHow to solve crisis, whenever it comes

Index retirement age to life expectancyIndex retirement age to life expectancy Raise ceiling on taxable income (currently $87K)Raise ceiling on taxable income (currently $87K)

Unnecessary to cut benefits or raise tax ratesUnnecessary to cut benefits or raise tax rates Raising retirement age is an implicit cut in total Raising retirement age is an implicit cut in total

benefits but not in benefits paid out per yearbenefits but not in benefits paid out per year Raising ceiling makes financing system less Raising ceiling makes financing system less

regressiveregressive

Bush Proposal: Bush Proposal: Personal Accounts Personal Accounts

Divert 2% into personal accounts from existing Divert 2% into personal accounts from existing tax of 12%tax of 12%

This robs the system of 1/6 of its revenueThis robs the system of 1/6 of its revenue Creates a multi-trillion $ financing holeCreates a multi-trillion $ financing hole The assumption of a continuing equity premium The assumption of a continuing equity premium

ignores historyignores history Greater macroeconomic stability implies less riskGreater macroeconomic stability implies less risk Remaining equity premium, if any, is a reward for Remaining equity premium, if any, is a reward for

riskrisk

America’s Disfunctional America’s Disfunctional Medical Care Non-systemMedical Care Non-system A multi-part indictmentA multi-part indictment

High spending with no payoff in life High spending with no payoff in life expectancyexpectancy

Large uninsured populationLarge uninsured population High drug prices subsidize research for the High drug prices subsidize research for the

rest of the worldrest of the world Bush proposals would make matters worseBush proposals would make matters worse

Real vs. Nominal Medical Care Spending

as a Share of GDPMedical Spending As a Share of GDP

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5

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1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002

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Real

Medical Care Spending Medical Care Spending Ratios ComparedRatios Compared

U. S. 13.9 percent of GDPU. S. 13.9 percent of GDP Germany 10.7Germany 10.7 Canada 9.7Canada 9.7 France 9.5France 9.5 Italy 8.4Italy 8.4 Japan 8.0Japan 8.0 U. K. 7.6U. K. 7.6

Doctors per CapitaDoctors per Capita

Italy 4.3Italy 4.3 France 3.3France 3.3 Germany 3.3Germany 3.3 U. S. 2.7U. S. 2.7 Canada 2.1Canada 2.1 U. K. 2.0U. K. 2.0 Japan 1.9Japan 1.9

Hospital Beds per capitaHospital Beds per capita

Germany 6.3Germany 6.3 Italy 4.3Italy 4.3 France 4.2France 4.2 U. K. 3.9U. K. 3.9 Canada 3.2Canada 3.2 U. S. 2.9U. S. 2.9

And that inconvenient And that inconvenient fact . . .fact . . .

U. S. is in the middle of the league table of rich U. S. is in the middle of the league table of rich nations for life expectancy, nowhere near the nations for life expectancy, nowhere near the toptop

In a recent survey of 13 countries, U. S. ranks In a recent survey of 13 countries, U. S. ranks second from bottom for 16 available health second from bottom for 16 available health indicatorsindicators Bottom in infant mortality, 10Bottom in infant mortality, 10thth in life expectancy at in life expectancy at

age 15age 15 Poor people line up in emergency rooms and Poor people line up in emergency rooms and

aren’t getting preventive carearen’t getting preventive care

DiagnosisDiagnosis

Compensation is more unequal in U. S., Compensation is more unequal in U. S., so need to pay more to attract doctors so need to pay more to attract doctors from the talent poolfrom the talent pool

Fragmented organization gives more Fragmented organization gives more market power to the supply side than the market power to the supply side than the demand sidedemand side

Much of the extra expense is soaked up Much of the extra expense is soaked up by the administrative complexityby the administrative complexity

Administrative Administrative ComplexityComplexity

““Truly bizarre” system with thousands of Truly bizarre” system with thousands of payerspayers

Payment systems differ for no socially Payment systems differ for no socially beneficial reasonbeneficial reason

25% of U. S. expenses go to 25% of U. S. expenses go to administrative costsadministrative costs

Administrative costs for private insurance Administrative costs for private insurance are 2.5 to 3x higher than public programsare 2.5 to 3x higher than public programs

Decentralized Federal Decentralized Federal System adds more System adds more

complexitycomplexity ““Medicaid” (free health care for the very Medicaid” (free health care for the very

poor) is administered at the state levelpoor) is administered at the state level Individual states differ in who is coveredIndividual states differ in who is covered Fiscal deficits at state level have resulted Fiscal deficits at state level have resulted

in cutbacks of eligibility, coveragein cutbacks of eligibility, coverage Federal-financed “medicare” for the Federal-financed “medicare” for the

elderly is very partial, no coverage for elderly is very partial, no coverage for drugs drugs

Pharmaceutical PricesPharmaceutical Prices

Other nations use market power of central Other nations use market power of central government buying to hold down drug pricesgovernment buying to hold down drug prices

As a result of lack of regulation in U. S. As a result of lack of regulation in U. S. (explicitly mandated in recent bill) drug buyers (explicitly mandated in recent bill) drug buyers in U. S. subsidize research for the rest of the in U. S. subsidize research for the rest of the worldworld

More than half of U. S. drug revenue goes for More than half of U. S. drug revenue goes for administrative costs, sales costs, and net profitadministrative costs, sales costs, and net profit

Policy Solutions: Policy Solutions: the Bush Approachthe Bush Approach

““Health Costs are high because people Health Costs are high because people have too much insurance and purchase have too much insurance and purchase too much medical care”too much medical care”

Solution: health savings accounts with Solution: health savings accounts with very high deductiblesvery high deductibles Like all personal tax-deductible accounts, a Like all personal tax-deductible accounts, a

subsidy to the richsubsidy to the rich High deductibles reduces preventive careHigh deductibles reduces preventive care

Kerry’s Approach was Kerry’s Approach was too Timid too Timid

Keep present system, have government pay for Keep present system, have government pay for catastrophic carecatastrophic care

Does not deal with basic flaw: tying medical care to Does not deal with basic flaw: tying medical care to employmentemployment

Makes U. S. firms uncompetitive in international Makes U. S. firms uncompetitive in international comparisonscomparisons G. M. has medical costs of $1,400 per auto produced relative G. M. has medical costs of $1,400 per auto produced relative

to Toyotato Toyota Pushes firms to offer part-time employment with no medical Pushes firms to offer part-time employment with no medical

benefitsbenefits Helps explain slow growth of employment in this 2001-2004 Helps explain slow growth of employment in this 2001-2004

economic recoveryeconomic recovery

Solution? Why Can’t theSolution? Why Can’t theU. S. be more like U. S. be more like

France?France? Americans hear many complaints about Americans hear many complaints about

the Canadian systemthe Canadian system We know virtually nothing about medical We know virtually nothing about medical

care financing in Europe or Japancare financing in Europe or Japan Your turn . . . Your turn . . .