US Government Debt Different - Finance Department - University of ...

Deborah Lucasrevenues. In fact, many plans for how to restore balance have beenproposed and analyzed. 3 The basic elements generally include gradualincreases in the normal retirement age (possibly linked to longevitychanges), benefit cuts or higher taxation of benefits for wealthierbeneficiaries, removal of the annual cap on payroll tax collections,and moderate increases in the payroll tax. An important theme insuch analyses is that acting sooner, or at least having a credible plan,has the advantage that it gives people more time to prepare for thechanges and ultimately allows smaller adjustments to be made.105The rising cost of Medicare, and to some extent of Medicaid, is drivenby the excess cost growth in medical services, and also by theaging of the population. Lowering the growth rate of federal healthcare spending is almost certainly a prerequisite for achieving fiscalbalance. Unlike for Social Security, there is little agreement aboutwhat the solution should look like. Some favor price controls onmedical services; others fear those measures would degrade the qualityof care and stifle innovation. Rather, they see the need to harnesscompetitive forces to create incentives for providers to controlcosts. Some would like to limit Medicare benefits for higher incomehouseholds; others believe that greater use of means testing wouldundermine political support for the program. Some would like toprivatize Medicare and provide vouchers to low-income retirees tobuy private insurance; others fear it would create a two-tier systemwith insufficient care for the poor. Such debates have been raging fordecades and there are no signs of an emerging consensus. Nevertheless,because the rising cost to the government of health care is toolarge to be tolerated for much longer, I believe that something willbe done to change that trajectory (although I would not like to wageron what the approach will look like).Risks to the Fiscal OutlookThus far, I have argued that, despite the impediments to restoringbalance, the most likely paths for future fiscal policy will avoid afiscal crisis and the accompanying risk of default. However, there3 For a survey of policy options and their quantitative implications, see CongressionalBudget Office, “Social Security Policy Options,” July 2010.