A Fiscal Responsibility Summit?

Tue, 20 Jan 2009 00:28:14 +0000

Readers of CGG since the election will note that in my advice to the Obama administration for what to do first, I have steered clear of Medicare and Social Security. His immediate objectives should be to build coalitions and achieve some tangible success on whatever scale he can manage.

Entitlement programs don't allow that to happen. Entitlement programs are social insurance, the point of which is to redistribute resources across the population. Reform will mean less redistribution -- less of something for someone. A president needs not just goodwill to do that, he needs a track record of being able to implement policies in which he has held up his end of a bargain. He doesn't have that yet. When he gets it, he can take on the big challenges that will emerge over the next couple of decades.

Friday's Washington Post contained an article with a very provocative headline, "Obama Pledges Entitlement Reform." Here are the first two paragraphs:

President-elect Barack Obama pledged yesterday to shape a new Social Security and Medicare "bargain" with the American people, saying that the nation's long-term economic recovery cannot be attained unless the government finally gets control over its most costly entitlement programs.

That discussion will begin next month, Obama said, when he convenes a "fiscal responsibility summit" before delivering his first budget to Congress. He said his administration will begin confronting the issues of entitlement reform and long-term budget deficits soon after it jump-starts job growth and the stock market.

I consider it an encouraging sign that he is willing to begin framing the issues this soon in his term in office, perhaps even more so because doing so is politically risky. I don't think Obama has in mind anything that would resemble a carve-out personal account plan for Social Security. Perhaps he would suggest some tweaks that would phase in higher revenues or lower expenditures to extend its solvency. In the context of a "fiscal responsibility summit," he can probably bring enough Republicans along to get a reform that his political base thinks is good. This is what I wish President Bush would have done in 2005 when he had the opportunity.

The real challenge for Obama is Medicare, and in particular what to do about the projected growth in age-adjusted costs per beneficiary. If you cannot limit them, then you have to start thinking about raising the eligibility age. Perhaps that could emerge as a possibility, with older workers (say, above 60 but below the new eligibility age) now able to buy into Medicare at a rate that is roughly actuarially fair. It will be interesting to see what the summit produces next month.

For more, see this post at EconomistMom.