September 22, 2014

Aging, Costs, and Interaction

It has almost become axiomatic that growing health care costs, rather than population aging, is the overwhelming cause of a projected spike in federal spending. That notion was dispelled in CBO’s Long-Term Budget Outlook published last week. As explained in the report:

“Federal spending on Medicare, Medicaid, and Social Security will grow relative to the economy both because health care spending per beneficiary is projected to increase and because the population is aging. Spending on Medicare and Medicaid will be driven by both factors, while Social Security spending will rise because of the population’s aging. Between now and 2035, aging is projected to make the larger contribution to the growth of spending for those three programs as a share of GDP. After 2035, continued increases in health care spending per beneficiary are projected to dominate the growth in spending for the three programs.”

 

Later in the report, CBO quantifies the relative effects of aging and health care growth on projected spending:

 

Between now and 2035, an aging population—driven by both the retirement of the baby-boom generation and increases in life expectancy—explains 64 percent of spending growth in  Medicare, Medicaid, and Social Security. It explains all of the growth in Social Security spending and 44 percent of the growth in spending on Medicare and Medicaid over that period. In the long term, by contrast, growth in health care spending per beneficiary is a more important factor than population aging. Excess cost growth explains 56 percent of the projected growth in spending, as a percentage of GDP, on the three largest entitlement programs between now and 2080. It explains none of the projected growth in Social Security but 70 percent of that in Medicare and Medicaid.”

 

These conclusions may take some by surprise because they represent a change from CBO’s 2007 report on the long-term budget outlook, which used a different methodology. My view is that this is a positive change and one that is consistent with CBO’s pre-2007 reports.

 

The key policy implication is that we don’t just have a health care problem.  Spending growth in the big three entitlement programs, Social Security Medicare and Medicaid will grow sharply in the coming two decades even without a steep increase in per capita health care spending. So while cost-saving health care reform is very important, so too is entitlement reform. And, given the magnitude and timing of the demographic crunch, we can’t defer entitlement reform in hopes of first “fixing” the entire health care system.