Debt Digest | US Healthcare is Far From Being a Free Market System
Links & Fiscal Facts
Here are this week’s reading links and fiscal facts:
US healthcare is far from being a free market system. Cato’s Michael Cannon challenged the myth of a free market in US healthcare on The Bob Harden Show podcast. Cannon stated, “Data from the OECD showed that in the United States, the government controls a larger share of health spending than in the average OECD nation, and in all but seven other OECD nations. [...] [The US] Government controls a larger share of healthcare spending than in the United Kingdom or Canada, which have government-run, single-payer systems [see the figure below].“ He added, “In other countries, their socialized health systems have budgets. The government puts a limit on how much it will spend. The government of the United States doesn’t do that. Medicare and Medicaid programs don’t have budgets. The government just pays whatever the doctor orders up.” As shown in a previous Digest, because these healthcare programs operate on autopilot, healthcare spending has driven half of the total spending growth over the past 22 years, with Medicare accounting for nearly 70 percent of the government’s total estimated unfunded obligation over the next 75 years.
Stabilizing the debt at current levels requires nearly $10 trillion in deficit reduction over the next decade. According to the Committee for a Responsible Federal Budget (CRFB), “[H]olding the debt to the size of the economy would require $3.6 trillion of deficit reduction (including interest) over five years and $9.3 trillion over ten years.” In addition, maintaining the debt at current levels (99 percent of GDP) would require a $9.7 trillion deficit reduction over the next decade. In 2023, Cato’s Chris Edwards presented a plan to stabilize the debt at 100 percent of GDP by 2033. Edwards’ plan proposes achieving this goal through entitlement reforms, such as cutting Social Security spending by reducing cost of living (COLA) adjustment for benefits and limiting Medicare’s growth to the GDP growth rate. In addition, the plan restores federalism by cutting various federal aid-to-state programs, leaving it up to states and local governments to determine and fund programs like welfare, housing assistance, and transportation projects. For a detailed outline of the plan, see the table below.
Higher spending caused the $400 billion increase in CBO’s deficit projections. Emma Camp, an assistant editor at Reason, discusses the factors contributing to the $400 billion increase in the Congressional Budget Office’s updated deficit projection for 2024. The 27 percent rise from CBO’s February to June deficit projections is mainly due to increased spending in several areas: student loan forgiveness ($145 billion), increased Federal Deposit Insurance Corporation (FDIC) costs ($70 billion), additional legislation ($60 billion), and higher-than-expected Medicaid costs ($50 billion). Camp notes the long-term deficit outlook has also worsened, warning, “If the deficit continues to increase as the CBO predicts, the outcome could be disastrous.” She concludes the article by featuring our work: “‘As debt grows unabated, there is the risk of a sudden loss of confidence in bond markets, with investors demanding much higher interest rates that could trigger a debt doom loop and broader fiscal crisis,’ Cato Institute researchers Romina Boccia and Dominik Lett warned this week. ‘Congress and the Biden administration should cut spending now while the economy is growing and conditions are favorable for deficit reduction, alleviating pressure on interest rates and the federal debt to grow, and before a fiscal crisis forces their hands.’”
The Social Security trust fund illusion. I recently joined Caleb Brown and Manhattan Institute’s Brian Riedl on Cato’s Daily Podcast to discuss Social Security. I clarified that nothing is saved from one’s payroll taxes for retirement, explaining, “Social Security is more of a sharing program, where current workers pay for the benefits of current retirees [...].” Brian Riedl highlighted that the program’s $3 trillion “surplus” is American taxpayers’ liability, stating, “This money has to be paid back to Social Security with interest. That means the Treasury not only has to come up with an additional $3 trillion to make up for the raided trust fund but they have to give an extra $3.5 trillion to Social Security to pay the interest.” On the topic of reform, Riedl emphasized the need for bipartisan cooperation: “I agree with Romina that we are not going to fix this with a Republican partisan bill or Democratic partisan bill. [...] You are going to need both parties to sit down and strike out a compromise. [...] I think a commission is a good way of doing that.” For more on the illusion of Social Security surpluses, see Brian Riedl’s post on X. For more on the fiscal commission, read this.
Don’t eliminate taxes on Social Security benefits. Former President Donald Trump recently suggested repealing taxes on Social Security benefits. The Committee for a Responsible Federal Budget (CRFB) estimates that this move would “[i]ncrease deficits by $1.6 trillion to $1.8 trillion through 2035,” while significantly worsening Social Security’s funding shortfalls. As the Tax Foundation’s Garret Wilson has argued, while the current tax treatment of Social Security benefits is complicated, “Social Security benefits should still be considered income, and it would be proper to include them in the income tax base.” Cato proposes removing the income thresholds and taxing 85 percent of all Social Security benefits. As Cato’s Adam Michel explains, “Exempting them [government benefits] understates the recipients’ income and increases relative tax rates on labor-market income. Including government benefits, such as welfare benefits and some Social Security payments, in taxable income would increase revenue by $66 billion a year.”