Medicare and Social Security Are Bad Policies, Regardless of the U.S. Bond Rating

Jeffrey Miron

This article appeared on Substack on August 4, 2023.

Fitch has just lowered its rating of U.S. debt from AAA to AA+. This is a modest step, but it reminds everyone that:

According to projections from the Congressional Budget Office, the United States faces a perilous fiscal future; and

The only plausible fix is slower growth of entitlements, especially Medicare and Social Security.

Conventional wisdom then concludes that the United States is between a rock and a hard place: it must risk fiscal catastrophe or cut widely popular and economically vital programs.

The political difficulty of cutting entitlements is undeniable; almost every voter either collects or expects to collect those benefits.

The economic value of these programs, however, is debatable.

Medicare subsidizes the purchase of health care. Standard economics holds that when government subsidizes a good, the economy produces and consumes too much relative to the efficient, laissez‐​faire outcome. (This holds even if health insurance markets suffer from asymmetric information and adverse selection. Those conditions might suggest intervention, but not subsidizing health insurance.)

Thus scaling back Medicare implies a more productive economy, with fewer resources devoted to health care and more to other goods and services.

Consistent with this view, abundant evidence suggests that health expenditure has a modest impact on health.

Social Security also lowers economic productivity by distorting savings and retirements decisions relative to a free market.

Regardless of the fiscal outlook, therefore, concern for economic productivity implies scaling back or eliminating both programs. The obvious adjustments are a higher age of eligibility for both Medicare and Social Security, plus larger co‐​pays and deductibles for Medicare. These changes can phase in over decades so that the pain is spread across many cohorts.

Reducing these programs will also have distributional implications, but these reinforce the case for cuts: both programs mainly benefit the middle class, not those living in poverty. Directly targeted anti‐​poverty programs (perhaps including Medicaid) and disability insurance are more reasonable ways to address distributional concerns.

Cutting Medicare and Social Security is therefore a no‐​brainer, if only the politics will let it happen.