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Fri Nov 9, 2012, 08:11 PM

Social Security: The Phony Crisis [View all]

New book by Dean Baker and Mark Weisbrot


So much for the “demographic time bomb” with which the system’s “reformers” have been threatening us. With a few selected facts dressed up as surprises—such as a rising elderly population or a declining ratio of workers to retirees—and an oversized dose of verbal and accounting trickery, opponents of Social Security have been able to create the impression that the program is demographically unsustainable. This impression is false, as would be any economic projections that failed to take into account the other side of the equation, namely, the growth of the economy (see chapter 1).

Even the financial problems of Medicare do not result, for the most part, from demographic changes. While it is true that older people, on average, require more health care than the young, overall health care spending, as a percentage of gross domestic product, does not necessarily have to increase with the average age of the population. In fact, among most developed countries there appears to be no correlation between health care spending and the percentage of the population that is over 65. As a percentage of our economy, we spend twice as much on health care as does Sweden, for example, yet 17.3 percent of Sweden’s population is over 65, a proportion we will not reach for another 25 years (see chapter 3).

Rather, the financial threat to Medicare arises as this relatively more efficient system—its administrative costs are less than one-fourth those of the private system—is subjected to increasing “marketization.” The number of senior citizens who get their Medicare coverage through health maintenance organizations (HMOs) more than tripled from 1992 to 1998 and has been growing at a rate of 25 percent per year. It doesn’t take a fiscal genius at an HMO to figure out how to profit in this market. With about 90 percent of senior citizens costing Medicare an average of only $1,200 each, and with the government paying HMOs up to $6,000 per person, depending on the region, managed-care providers have been able to profit enormously by selecting, as much as possible, the healthiest senior citizens and leaving the rest (the least healthy 10 percent cost about $37,000 each) in the hands of Medicare. It all works out quite nicely for the HMOs, who can point to rising costs for Medicare relative to the more “efficient” private sector. Never mind that the HMOs’ cost reductions are achieved not only through selection of healthier patients—wasting even more resources in the selection process—but also by cutting back on necessary medical procedures. The prejudice in favor of market-based solutions is so powerful that even the groundswell of consumer dissatisfaction has yet to force policymakers to reexamine it.

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