Medicare and Social Security Are Bad Policies, Regardless of the U.S. Bond Rating

pa href=https://www.cato.org/people/jeffrey-miron hreflang=undJeffrey Miron/a
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p class=reduced text-sans-alternateThis article appeared on a href=https://jeffreymiron.substack.com/Substack/a on August 4, 2023./p
pFitch has just a href=https://www.fitchratings.com/research/sovereigns/fitch-downgrades-united-states-long-term-ratings-to-aa-from-aaa-outlook-stable-01-08-2023 rel=nofollow ugc noopenerlowered/a its rating of U.S. debt from AAA to AA+. This is a modest step, but it reminds everyone that:/p
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pAccording to a href=https://www.cbo.gov/publication/59014 rel=nofollow ugc noopenerprojections/a from the Congressional Budget Office, the United States faces a perilous fiscal future; and/p
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pThe only plausible fix is slower growth of entitlements, especially Medicare and Social Security./p
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/olpConventional wisdom then concludes that the United States is between a rock and a hard place: it must risk fiscal catastrophe or cut widely popular and economically vital programs./p
pThe political difficulty of cutting entitlements is undeniable; almost every voter either collects or expects to collect those benefits./p
pThe economic value of these programs, however, is debatable./p
pMedicare subsidizes the purchase of health care. Standard economics holds that when government subsidizes a good, the economy produces and consumes too much relative to the efficient, laissez‐​faire outcome. (This holds even if health insurance markets suffer from asymmetric information and adverse selection. Those conditions might suggest intervention, but not subsidizing health insurance.)/p
pThus scaling back Medicare implies a more productive economy, with fewer resources devoted to health care and more to other goods and services./p
pConsistent with this view, abundant a href=https://www.nber.org/papers/w11609 rel=nofollow ugc noopenerevidence/a a href=https://www.nejm.org/doi/full/10.1056/nejmsa1212321 rel=nofollow ugc noopenersuggests/a that health expenditure has a modest a href=https://www.rand.org/pubs/research_briefs/RB9174.html rel=nofollow ugc noopenerimpact/a a href=https://www-nber-org.ezp-prod1.hul.harvard.edu/papers/w29877 rel=nofollow ugc noopeneron/a a href=https://bfi.uchicago.edu/wp-content/uploads/2021/12/BFI_WP_2021-146.pdf rel=nofollow ugc noopenerhealth/a./p
pSocial Security also lowers economic productivity by distorting savings and retirements decisions relative to a free market./p
pRegardless of the fiscal outlook, therefore, concern for economic productivity implies scaling back or eliminating both programs. The obvious adjustments are a higher age of eligibility for both Medicare and Social Security, plus larger co‐​pays and deductibles for Medicare. These changes can phase in over decades so that the pain is spread across many cohorts./p
pReducing these programs will also have distributional implications, but these reinforce the case for cuts: both programs mainly benefit the middle class, not those living in poverty. Directly targeted anti‐​poverty programs (perhaps including Medicaid) and disability insurance are more reasonable ways to address distributional concerns./p
pCutting Medicare and Social Security is therefore a no‐​brainer, if only the politics will let it happen./p