Bernard I seriously doubt you know how to read. I noted in the opening post that it would be unlikely we'd get to a point where we end up way down the CBO projections.

However, there is a second cause. Health care costs have been rising at an unsustainable rate. Here is a simple exercise to show the problem. Suppose today you are spending $1 on health care and that you have $2 in income. Further you income grows at 3% per year and health care expenditures grow at 5% per year. How long until you can no longer afford health care? At about the 37 year mark your expenditures on health care is just about equal to your income. In short you’ll have no more money for food, housing, transportation, and entertainment. Clearly that is not sustainable. In reality, something would “give” well before you got to that point.

Prehaps a course in remdial reading, or maybe some work on improving your memory.

Most cordially,
--Steve

I think we should design a "basic healthcare" coverage, package it as a voucher, and give it to every American.

Oddly enough Odograph, I've argued for something similar using catastrophic health care and a voucher system.

This notion Benard peddles that I'm a conservative just wanting to destroy the social safety net just isn't accurate, to be charitable to Bernard.

Start if off by giving vouchers to vets, and scraping the VA system.

I'm tellin' ya, you'll have more "market" in your solution that way than the mess we'll have in 10 years.

(And Steve, that is the opportunity with the confusion of change to reign costs/coverage back.)

Fascinating. Exasperation. I'm doing the Texas three step right now.......looking at businesses for investment in San Antonio, Austin and Dallas, but I'd like to (and will) read first hand your post, Bernard. But if Steve had it right, that you sighted total government expenditures as a percent of GDP, but did not acknowledge the rotation from defense to social spending and the obvious implications....everything you and I have debated the last week.....well, talk about exasperation.

I have to reserve judgement on "open minded" until I read your analysis first hand. But Verdon is not prone to misquoting. I'm not optimistic.

Makes about as much sense as that upward slope on the CBO graphs.

With all due respect... I don't think you fully understand how the CBO does projections. In an effort to isolate them from political pressure, they adopt all sorts of restrictive requirements on how they make projections. In fact, on Social Security, there are plenty of people closer to my view than the CBO view... and I will document fully in my full post on the topic.

But look... can we use common sense here? The CBO projection for Medicare and Medicaid is that it will eat up something like 16% of GDP. Right now, Medicare and Medicaid represent 1/3 of U.S. health care spending -- the rest is private sector. Keep the ratios the same. Do you really think it is even possible for nearly 50% of GDP to be devoted to health care. Even if we do nothing about it... how is that possible? Yet, that is what the CBO projects will happen.

Look, I can see I'm wasting my time with you. I'll continue writing on these issues elsewhere where hopefully some open-minded people will want to discuss the issues with me.

Respectfully,

--Bernard

I find it hard to believe that an expert on international security can see a major flaw in the work of not just the CBO and their economists, but just about every other economist out there such as William Gale, Laurence Kotlikoff, Jagdeesh Gokhale, all the other economists I've mentioned prior to this and many more.

[Note: there is, generally speaking, broad agreement that we face serious fiscal issues in the medium to long term with Medicare and then Social Security being factors. This agreement spans the political spectrum as well (the differences are in how to address the problem). Bernard kind of reminds me of a Global Warming skeptic or a Creationist.]

And your claim that these projections the other assumptions are so error prone that only you have seen that together they constitute an unreasonable set of projections? Really?

I get the confidence for challenging them because, CBO projections are just not that good. Again, I will post more details on this later. But look back at the 2002 CBO economic projections and compare them with reality. In 2002, the projected 2007 GDP at $13.4 billion in nominal terms, it was actually $13.8 billion. GDP was 3% larger than they estimated a mere 5 years after their estimate.

Yes, however, there are ranges of projections. They don't look at just one set of assumption or one set of projections. What you are arguing is that, not only are their projections wrong they are all pessimistic, so basically we need do nothing and there we go, all problems solved because the projections were overly pessimistic.

Funny, just a week ago you were the one saying I was "behind the curve" and implying I'm too optimistic and now we've reversed. You are the one arguing for the optimistic view and that we should ignore not only the pessimistic view but everything other than the pessimistic.

This real life problem is called defensive medicine. As an aging internist, I confess that I have been practicing "defensive medicine" much of the past 40 years.

Cut down the tort problem and a LOT of health care technology will be reduced in use.

We also are providing health care to anyone who comes across the border and that is mushrooming in costs to hospitals with losses to the doctors.

If these two problems are factored out, the GROWTH in costs will slow noticeably.

The administration's plan to have a "board of experts" decide what procedures will be paid will turn out to be an anti-scientific medical disaster for the 30-40 % of people who fall outside the median. The experts will aim for the median. In this kind of program, a patient who fails to be average will die from his or her illness.

And I'll also add I did ask Bernard what he thought would be a good strategy to contain health care spending, his response was rather a disappointing assertion that we'd contain spending. Not exactly a strategy to give one much hope of success.

Actually, I think I said somewhere that I would have a full-length post on that on my site at the end of my budget series. But I have been quite verbose recently, so it is quite possible it got lost in the shuffle.

Yes, but that is a rather optimistic assumption/projection IMO. Most baseline scenarios from most people who look at this conclude that SS will go closer to 6% of GDP.

I can't address this in sufficient detail here, but I promise I will shortly. Short version -- if we make a POLICY decision to increase benefits -- then yes, we may hit 6%. I know some projections show that... but they do so for all sort of bizarre reasons, some methodological, some statuatory, etc. The only thing we have a pretty good projection on is the number of elderly because the elderly we are talking about are already walking among us. Everything else is a morass of assumptions. And the elderly population is slated to grow by about 2% a year from now until, I believe, something like 2045. (I will post full details shortly.) It varies from year to year of course, but the average increase is 2%. So... if you assume that the economy grows at 2% per year, then then social security should cost about what it does now. What throws it off are all sorts of assumptions about labor productivity, immigration, price deflators, etc. The problem is that all of these assumptions are ultimately free-standing. They are not required to reconcile back into some bottom line.

If the Social Security eligible population grows at the same rate as the economy grow, the analytic bias should be towards a model that suggests a rough steady-state in Social Security expenditures. There are good ways to create such models -- effectively using attractors along projection curves.

It isn't that I claim to be smarter than folks at the CBO. I am not. They know the details of this much better than I do. But they are so down in the weeds, tweaking assumptions about issues I can't even begin to understand, that they are not seeing the big picture.

I get the confidence for challenging them because, CBO projections are just not that good. Again, I will post more details on this later. But look back at the 2002 CBO economic projections and compare them with reality. In 2002, the projected 2007 GDP at $13.4 billion in nominal terms, it was actually $13.8 billion. GDP was 3% larger than they estimated a mere 5 years after their estimate. The GDP projection was the best of the lot. The less sexy projections -- about 10 year T-bills, wages/salaries as percentage of GDP, were worse. And those less sexy projections, because they drive the actuarial models for Social Security can add up to huge mistakes.

So... and I have gone on longer than I expected... once you realize that these projections are error-prone, what do you do? Most people, without giving it a second thought, assume that any errors will be random clustering around the projection. But that biases thing even more because now you get worst case models that look even worse. I would argue that once you accept that there is a margin of error, you have to move the cone of projections toward whatever data points are actually known... in this case... the elderly population figures. If you do that, you come up with an assessment closer to mine than the middle CBO model.

No, I haven't changed my position if anything all I've done is lay it out more carefully and completely.

And even though I think SSA is badly structured if we were to replace I wouldn't argue that whatever replaces it provide drastically less benefits.

As for ther eligibility age you could make is 70 years old and then index it to life expectancy.

A big issue missed on discussing healthcare- the U.S. is essentially subsidizing the rest of the world on developing and applying medical advances.

I have touched on this in regards to prescription drugs actually. I don't have an answer either other than to note that is should be taken into account when making cross country comparisons.

Bernard,

We currently spend 4% of GDP on Social Security. If we continue to spend 4% of GDP on Social Security into the future, we will not have to cut benefits at all (assuming 2% real GDP growth per year).

Yes, but that is a rather optimistic assumption/projection IMO. Most baseline scenarios from most people who look at this conclude that SS will go closer to 6% of GDP. That is a 50% increase. We could probably obtain that 4% by making some changes to the program, but nothing drastic mind you.

The problem with the notion that we need to cut pretty much everywhere in order to make room for health care costs is that it does not make a difference. Let's say you managed to cut Social Security by 30% due to means testing, capping of benefits, whatever. Would that make projected health care costs sustainable? No.

Of course not, I'm not arguig this. Please stop implying I am or I will simply start editing it out of your comments. You have been warned.

My response is that we need to cut Medicare as well, either via reforms to health care or by implementing measures similar to the ones in reducing Social Security. In fact, this could be part of the strategy to reduce health care costs. Medicare is undoubtedly one reason why health care costs have risen so fast.

Making major policy changes to accomodate --- even in a small way -- the continued increase in health care costs makes no sense since we are already spending way more than makes any economic sense.

In an academic/theoretical sense I agree with you. The real problem is health care spending, so that is what should be fixed. Problem is we don't live in an academic or theoretical world and as such we have to also factor in the politics of the situtation. The politics may very well make a viable academic/theoretical solution infeasible.

And one last thing Bernard, if you'd stop assuming bad intentions on my part I'll stop treating you badly.

anjin-san,

The attempt to link SS with Medicare/Medicaid seems to me to be motivated entirely by politics and ideology.

No it is motivated by the rather grim fiscal outlook. On my side are people like Eugene Steurle, Edward Gramlich, Alice Rivlin, Laurence Kotlikoff, etc. On Bernard's side are people like Ezra Klein and Kevin Drum. If we go back to a post from a few days agoe we even have a link to this article given to us by Bernard...which indicates that Obama is even on my side.

WASHINGTON — President-elect Barack Obama said Wednesday that overhauling Social Security and Medicare would be “a central part” of his administration’s efforts to contain federal spending, signaling for the first time that he would wade into the thorny politics of entitlement programs.

Of course there hasn't been much on this yet, and given Obama is a politician nothing might come of it.

Dave,

BTW, I read Steve's comments a little differently. I think the short form is that if you take enough off the table in resolving the structural component of the deficit the problem becomes intractable.

Essentially yes. I'm arguing we shouldn't take anything off the table at least not until we've looked at all the options and how likely they are to succeed. I think the idea that we can contain health care quickly and easily is a pipe dream. Very few developed nations have a sustainable health care sector. This is a global problem and is likely the result of politics. Although I imagine the rhetoric from the Left will be that it is once again market forces.

And I'll also add I did ask Bernard what he thought would be a good strategy to contain health care spending, his response was rather a disappointing assertion that we'd contain spending. Not exactly a strategy to give one much hope of success.