Editor’s Note: *** Today, Health Affairs released the newest 10-year national health spending projections by researchers from the Office of the Actuary at the Centers for Medicare and Medicaid Services. Separately, Health Affairs also released a second paper providing annual estimates by health spending by medical condition.

In the post below, Rudy Penner of the Urban Institute says that the new CMS report once again emphasizes the need for reforming Social Security, Medicare, and Medicaid. In another Health Affairs Blog post, Gene Steuerle of the Peter G. Peterson Foundation discusses the significance of the new Health Affairs releases. ***

Those of us who have worried a long time about the nation’s long-term budget outlook are used to getting bad news. The dismal health cost projections from the National Health Statistics Group of the Centers for Medicare and Medicaid Services (CMS) do not come as a big surprise since similar numbers have been underlying long-run public expenditure projections for many years. The new element in our outlook is the damage done to the nation’s finances by the recession’s impact on tax revenues and safety-net spending and by the huge costs of the stimulus program and various financial bailouts.

Although the long-run budget problem is often blamed on “entitlements,” it is really only three programs that are responsible for making the budget situation unsustainable. They are Social Security, Medicare, and Medicaid. They constitute almost one-half of noninterest spending, and they are all growing faster than tax revenues.

The excess growth of Social Security is caused mainly by the aging of the population, which is the result of growing life expectancy, and the slow growth of the tax-paying population because of a dearth of births since the mid-1960s.

Social Security cost pressures will be particularly intense while baby boomers are retiring. But Medicare and Medicaid present the more difficult long-run problem. They are afflicted both by the aging of the population and by soaring per capita health costs at every age.

Something Must Change

Those projecting long-run budget totals often assume no increase in the overall tax burden; current law for Social Security, Medicare, and Medicaid; and other spending being roughly a constant share of the gross domestic product (GDP). The assumptions imply that deficits grow rapidly and that the public debt soars at an accelerating rate relative to GDP.

Those making the projections are not attempting to make a forecast. They are simply saying that something must change. Domestic and foreign public and private investors cannot be expected to buy all the debt created in such scenarios. Programs must be reformed, and very probably the overall tax burden must be raised.

Projections of this type made prior to the recession implied that we could get by the next ten years or so with a ratio of the public debt to GDP not much above 40 percent. The debt would not grow to more than 100 percent of GDP until around 2030. That gave us considerable time to reform our health system and Social Security. The recession and the policies enacted to respond to it have thrown that assumption into a cocked hat. Much uncertainty surrounds both the economy and the short-run budget outlook, but it is now not unreasonable to believe that the debt will surpass 70 percent of the GDP within four years. The date at which it surpasses 100 percent has been moved forward at least five years and maybe more. It is not at all clear at what point buyers of our debt will demand very high interest rates or go on strike altogether, but the matter has become much more urgent than anyone would have believed a year ago.

Ideally, any reform of Social Security, Medicare, and Medicaid would be phased in slowly, so that current and future recipients would have time to adjust to any changes. If we want to provide an early warning, it is most important that the reform process begin almost immediately. There is a risk that the international market for our debt will become unstable at any time because of the huge volumes that will have to be absorbed before we recover from the recession. The risk will grow if we show no sign of dealing with our long-run problems. If it suddenly becomes more difficult to sell our debt, reforms may have to be abrupt and very painful.

An Argument For Tackling Social Security First

How should President Barack Obama deal with the situation? He and his advisers clearly understand the problem, and he has spoken about it and mentioned the need for reform. It is unfortunate that he did not start the process of long-run reform while dealing with the current crisis. Countries such as Sweden, Canada, Italy, and Japan have used short-run crises as an excuse for fundamental reforms in their Social Security programs. However, he missed the opportunity to do that. In my view, he must recoup quickly and begin working on the long run in his first budget submissions this year.

Many budget watchers believe that there is a strong argument for tackling the Social Security problem first, even though it is not as serious as the health problem quantitatively. Scholars have studied a multitude of options for slowing benefit growth or raising payroll tax revenues. We know how much has to be done to make the program financially viable, and we know a lot about how different options would affect different groups of people. That does not mean that reform will be easy, but it will be much easier than health reform. Scholars have studied numerous options for reforming our health system in general and government programs in particular, but we are much less certain about the effects of particular options on cost growth and the effectiveness of medical care.

Two Major Barriers To Reform: Democrats And Republicans

There are two major barriers standing in the way of reform. They are called Democrats and Republicans. Many in the Democratic Party are reluctant to admit that there is any budget problem, and many more resist solving any part of the problem by slowing benefit growth. Meanwhile, a vast majority of Republicans are ferocious in their opposition to tax increases. The numbers simply do not work without some combination of reforms on both the benefit and tax sides of the equation.

If the much simpler Social Security program is tackled first and Democrats and Republicans can be persuaded to make concessions, then the outlook for solving the much more difficult health problem will be much improved. That may be a naïve view, but we no longer have the luxury of putting off the problem. It is necessary to act, and we’d better act fast.