What is the Real Fiscal Challenge?

Busting the Budget: Healthcare Costs or Entitlement Programs

On Monday, September 15th, six experts in fiscal policy and healthcare policy debated the nature of the nation’s pending fiscal crisis at the National Press Club. Moderated by TaxVox editor Howard Gleckman, the event featured Henry Aaron and Alice Rivlin of the Brookings Institution, Julie Barnes and Maya MacGuineas of the New America Foundation, Robert Greenstein of the Center for Budget and Policy Priorities, and Eugene Steuerle of the Peterson Foundation.

Henry Aaron warned that long-term deficit projections would be unsustainable, but argued that two questions must be answered: what causes these deficits and what should the solution be? Although the answers need not be the same, Aaron explained that healthcare cost growth is both the primary driver, and should be the primary solution. He offered 5 conclusions:

* Projected deficits are large and unsustainable.
* Spending cuts and Social Security reform can help reduce them a little bit, and should be undertaken.
* Healthcare spending, and the taxes needed to pay for them, should continue to grow faster than GDP.
* Healthcare cost growth can be slowed considerably, greatly reducing the projected deficit.
* The problem of future deficits is not an entitlement problem, but a problem of large and growing costs in the overall healthcare system.

Alice Rivlin then suggested that the panelists were in fact debating the wrong question. Rather than arguing over whether closing the fiscal gap should focus on entitlements reform or healthcare reform or tax reform, they should recognize that all three are important. Rivlin explained the there are really two problems driving entitlement growth – demographics and healthcare cost growth. Because of demographics, Social Security costs will rise rapidly over the next two decades and then begin to level off. Medicare and Medicaid, on the other hand, will rise steadily indefinitely. This means that Social Security is important in the short-term, while healthcare entitlements drive the deficit further into the future. Rivlin suggested five main solutions to the looming fiscal crisis:

* Encourage people to work longer by both reforming Social Security and changing rules and incentives in private pensions.
* Encourage more efficient distribution of medical care, using Medicare and Medicaid to lead payment system reform.
* Move toward universal healthcare coverage with spending controls.
* Shift healthcare expenses to the private sector where possible.
* Reform the tax code to make it more equitable and efficient so that it can bring in the needed revenue without being overly burdensome to the economy.