It's time to get serious about entitlement reform

The solution to America’s burgeoning entitlement crisis is not benefit cuts, nor abolishing social welfare programs, but immigration. It is time for politicians to be bold and take a stand on this.

Like many fiscally-conservative outlets, the Economist has not slowed down in its warnings about America’s long-run fiscal challenges. We have a bunch of unfunded entitlements, the claim goes, and what we need to do is cut benefits in order to solve the problem. And all the haranguing over the Fiscal Cliff and the Debt Ceiling is doing nothing to address the underlying fiscal imbalances. Medicare and Social Security benefits (that is, total outlays on these programs) must be cut!, they claim.

There’s something to this line of reasoning, but we all need to be a lot more honest about why these fiscal imbalances exist. The gap between inflows into these systems comes from two sources. One is the rising per-unit cost of healthcare. The steady upward march of healthcare prices has slowed somewhat, but still drastically outpaces inflation. The other is the declining “worker-to-beneficiary ratio”: the number of people paying into Medicare and Social Security is declining over time, while the number of people getting benefits is rising.

Conservatives like to carp about Obamacare not doing enough about healthcare costs, but neither party has made any serious proposals to do anything about these cost rises. Healthcare is an overly-complicated muddle in which no one knows how much anything really costs and there is little competition on either side of the market. I could write a whole book about the subject, and only know about small parts of it. Before I started my Ph.D. my job at Tom MaCurdy’s research firm was focused on one particular issue, which is that doctors and health care organizations are a lot like mechanics: they both tell you what services you need and sell you those services. This is one factor leading to excessive treatment and testing, which drives up costs, but there are many more.

Fixing the problem of healthcare prices will take a long time if it is possible at all, and has little to do with Medicare per se. Prices are rocketing upward in the private sector as well, and most private-sector payment policies are equally as stupid as what government programs do. Clearly we cannot focus on health care if we want to have a chance of doing anything about entitlement reform in the near term.

What about the beneficiary ratio? Can’t we fix that, by raising the age at which people are benefit-eligible? I definitely think raising the retirement age is a good idea: Sam King and I laid out the case for this a few years ago. Raising the eligibilty age for these programs will do little, however, and following the George W. Bush individual accounts plan would probably not do anything at all.

The reason is that as long as people retire at age 65, they will need to fund that retirement somehow. That funding can only come from claims on the income of current workers. If people have individual retirement accounts, they will hold investments that they can cash in through various means, but they would always need to grab some of current workers’ incomes, e.g. by selling stocks to them. No matter what mechanism we use to fund retirements, we will still have a worker-beneficiary ratio problem if people continue to retire at 65. This isn’t my idea – Ron Lee of UC Berkeley and Andrew Mason of the University of Hawaii have written an excellent book on the subject, available for free here. The graphs are awesome.

If we raise the Medicare and Social Security eligibility age, we will do a little to help abate this issue, especially if this induces a norm of a higher retirement age. Given how healthy many 65-year-olds are nowadays, this is sensible, as are programs to help older workers of any age who cannot work. Changing norms takes a long time, however, and we have a burgeoning problem already.

We have a solution to this problem, and it’s already being debated elsewhere in the halls of Congress: immigration reform. In a heartening turn of events, a number of Republicans are advocating letting America’s millions of illegal migrants stay in the country legally, and making legal immigration more streamlined. Where people are still failing, however, is in linking immigration reform to our fiscal challenges. Letting in more immigrants is the one thing rich countries can do to increase the number of workers per retireee. Not only that, but naturalized citizens have more children than native-born Americans, further alleviating our long-term problem. Loosening immigration restrictions would buy is decades of much-needed breathing space to start edging up the retirement age.

Far from being a selfish move, this would have massive benefits for both migrants and their home countries. Michael Clemens has made a passionate moral case for more immigration – here he is on Development Drums. Immigrants to the US see a huge spike in earnings, much of which they send back home to help their families. Many eventually return home, bringing wealth and skills to their communities. In attempting to gain skills that will be valuable abroad, people who want to migrate get more education and training, so even the ones who don’t make the cut end up richer (and bring benefits to their communities). For example, a large number of Filipinos become nurses in order to work abroad; many fail to find positions overseas, contributing to the country’s relatively high-quality healthcare.

Finally, this is simply the right thing to do. The world’s current national borders were largely determined through imperial conquest and deal-making by current rich-world countries. They have no special status, and it’s hard to see a moral case for caring more about people who lived on one side of an arbitrary line on a map than another.

America is on the verge of something wonderful here. I am the great-grandson of European emigrants who settled in America. My Irish and Italian forebears were the wrong kind of immigrants. They were different from the good kind, who had come earlier. They didn’t assimilate. They were genetically inferior, and not as smart as people from England or Germany. They stole our jobs and destroyed our way of life. Until they didn’t – until we realized that like all naturalized citizens, they were the proudest and most loyal Americans of all. Our culture has always cycled between the open borders that characterized the country originally, and periods of xenophobia and racism in which we have tried to keep foreigners out. It is time to get back to our roots. In so doing, we will also address the largest long-run economic problem we face.

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