Wednesday, April 6, 2011

Touching the third rail

For the benefit of students who have not heard the expression "touching the third rail": Some trains are powered by an electrically charged third rail. It can kill  you to touch this rail.
In the U.S., entitlement spending has long been considered a third rail. Any politician who touches entitlements, would be run out of office. 

But finally, someone has been brave enough to propose actual legislation that addresses spending on entitlements. The big three entitlements are: Social Security (income for the elderly), Medicare (healthcare for the elderly), and Medicaid (healthcare for the poor and disabled - includes nursing home care for many elderly, approximately 25% of Medicaid spending goes towards the elderly - see Kaiser diagram).

By 2020, the Congressional Budget Office projects that these three entitlements will consume half of Federal spending. If  spending on entitlements is not cut and the U.S. wants a balanced budget by 2020,  then either: (1) military expenditures and discretionary spending will have to be cut sharply by 1/3, (2) taxes will  have to be increased, or (3) some combination of the first two options.

So far,  most polls of the public show they are opposed to cutting entitlements, but that has not stopped Congressman Paul Ryan from proposing a plan to tackle the U.S.'s long term budget deficit by cutting entitlements. He proposes changing the rules so that Medicare recipients receive a voucher towards their private health insurance (instead of the U.S. government footing the whole bill). Medicaid would be replaced with fixed block grants to the states. He didn't propose anything for Social Security, but frankly it is the least problematic of the three.

This proposal would limit the federal government's risk, but increase the exposure of states and future seniors to rising health care costs. Theoretically, it is possible that if plans are well designed, once consumers face more of the costs they will shop for bargains and the private sector will compete for them.

Ryan's plan would not affect anyone 55 years or older today. This would certainly increase its political chances of passing, but it may not be fair to today's younger generation. For more on this read,

NY Times (4-5-2011) Generational Divide Colors Debate Over Medicare’s Future

Now it is up to the Democrats to offer details of an alternative solution. Some solution is required.

Notes: According to the congressional Budget Office (, total projected federal spending in 2020 is $5,412 billion, and total projected federal revenue in 2020 is $4,703 billion. This results in a projected deficit of $710 billion. To close the $710 billion budget gap solely by reducing spending on defense and "other", spending on these programs would have to fall from $2,057billion (16% + 22% of $5,412 billion) to $1,356 billion ($2,057 - $710), which represents a 34% drop.  

Testimony before the Committee on the Budget, United States Senate (charts)

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