Entitlements and Inequality

In a fifth installment of the forum on entitlements underway over at The American Prospect (and cosponsored by The Democratic Strategist, my virtual home away from home), Dean Baker of the Center for Economic and Policy Research explores entitlement spending in the context of broader issues, including trade deficits and inequality. Here’s a sample of his observations on the latter topic with respect to Social Security:

It is difficult to see how anyone can get be too concerned about the projected path of Social Security spending. It went from 4.1 percent of GDP in 2000 to 5.1 percent in 2013. It is expected to rise by another 1.1 percentage point of GDP over the next twenty years. It’s not clear why anyone would view this as a major problem.

It is also worth asking if we think the problem is that seniors have too much money now. Their median income is less than $20,000 a year. With the collapse of the defined benefit pension system and only a small fraction of the population able to accumulate significant assets in 401(k) or other retirement accounts, we should be asking whether benefits should be raised rather than lowered. Ideally, we would have a second leg to the retirement income system where middle- and moderate-income people can accumulate savings to help support themselves in retirement, but we don’t have that now for most retirees or near retirees.

Unless and until we do have a system that allows most workers to supplement their retirement income, we must recognize that Social Security is the only real retirement system for much of the population. (It provides more than 90 percent of the income for 40 percent of seniors.) The program is projected to face a shortfall in the years after 2033. Inequality is a big part of this story. If so much income had not been redistributed upward over the past three decades, placing it above the cap on taxable payroll, the projected shortfall would be 30-40 percent smaller.

Medicare spending projections, notes Baker, are unsustainable because of underlying health care inflation which has little or nothing to do with the program itself. And here, too, inequality is a not-so-hidden culprit:

Progressives should be upset by the projections of exploding growth. Essentially, they imply that we will be devoting an ever-larger share of the economy to paying rents to providers in the health care industry. While progressives must be ardent defenders of quality health care, we should also be vigilant in attacking rent-seeking that redistributes an enormous amount of income upward and is often harmful to the public’s health. If our per person health care costs were comparable to those of any other country’s, we would be looking at huge budget surpluses, not deficits.

Just to take the most obvious, doctors in the United States earn roughly twice the pay as the average for other wealthy countries. There is no reason to believe that we get better quality care for these generous paychecks. The country could save close to $80 billion a year (0.5 percent of GDP) if our doctors were paid the same as doctors in Europe or Canada. We could get much of the way towards bringing doctors’ pay in line with other countries by exposing them to international competition. It is incredible that we openly discuss bringing immigrant STEM workers, nurses, even farmworkers to bring down the pay in these sectors, but no one ever raises the issue of bringing in foreign doctors.

There is no reason that progressives should not make opening up the medical profession to market forces as a big item on our agenda. Doctors are the largest single occupation among the one percent, and virtually all of them are in the richest 5 percent of workers. We can make the economy more efficient, saving trillions of taxpayer dollars in the decades ahead, and promote equality by bringing the pay of our doctors in line with the rest of the world.

The same applies to drugs. We spend more than $300 billion a year on drugs that would probably not cost one tenth as much in a free market. The reason is government granted patent monopolies. The justification for patent monopolies is that they are needed to finance research. However there are much more efficient mechanisms to finance research.

Baker concludes by denying that entitlement spending represents a zero-sum problem with no progressive solutions.

The point is that we need a clear answer to the people who are scared by the projections of exploding health care costs. There are ways to deal with these costs, if the rich and powerful would just let us. We do not have worry about lack of ideas. Our problem is that lack of political power to implement them.

Ed Kilgore

Ed Kilgore, a Monthly contributing editor, is a columnist for the Daily Intelligencer, New York magazine’s politics blog, and the managing editor for the Democratic Strategist.