December 19, 2004

Social Security/Medicare revisited

Tyler Cowen asks an important question about the "borrow now, save later!" plan for Social Security:
If we can borrow all that new money "scot-free," will we truly reduce future expenditures on social security benefits? Or will those funds simply be diverted, either explicitly or implicitly, to finance the Medicare shortfall? Which way would you, as a bondholder, bet?
As I've written before, there are a lot of nitty-gritty reasons to tackle Medicare and spiraling health costs long before we ever touch Social Security. For starters, read Jesse Taylor's post, where he worries that Bush's plan will leave seniors with only 1/3 guaranteed benefits. Sadly, that's nonsense—it will be much less than that. So long as Medicare Part B premiums rise the way they do, and take increasingly large bites out of our Social Security checks, the president's plan will effectively leave retirees with zero guaranteed benefits down the road.

Notice what we can expect to happen on this course. The federal government of the future, nervous about giving its retirees zero guaranteed safety net, will either have to cover Medicare premiums on its own, expand guaranteed benefits again to avoid widespread senior poverty, or do something else costly. Either way, we're pretending to "shrink" Social Security now only to expand it (and/or Medicare) down the road. As a bondholder, I don't think I'd be especially confident in the long-term outlook of the federal government.
-- Brad Plumer 2:08 PM || ||