Commentary

Offset Opportunities

This article appeared in the American Spectator on October 18, 2005.
With hurricane reconstruction spending estimated to reach $200 billion or more, members of Congress are finally paying attention to the federal deficit and demanding a fiscally responsible approach to reconstruction efforts. Some are calling for spending cuts, such as eliminating pork projects in the recent highway bill. Sen. Chuck Grassley (R-Iowa) recently suggested tweaking Medicare, the federal health care program for the elderly and disabled. But those proposals are unlikely to yield enough savings.

But there is a simpler way to ensure that the burden of hurricane reconstruction doesn’t get shifted to future generations through larger deficits: repeal the Medicare prescription drug program scheduled to take effect in January.

Merely delaying implementation for two years (while retaining assistance for low-income seniors) would save $84 billion. However, repeal is preferable, and not just because hurricane relief efforts are forcing Congress to tighten its belt.

The Medicare drug program was ill-conceived from the beginning — a solution in search of a problem. Seventy-five percent of seniors already have drug coverage, and out-of-pocket costs only amount to one-third of seniors’ drug expenditures. Yet for some reason, Congress created a program for all seniors. The result is that taxpayers will be forced to pay drug bills that seniors and employers were already paying themselves.

The program was “sold” to Congress and the public with an initial price tag of about $400 billion over ten years. Today, the Congressional Budget Office estimates that the program will cost $850 billion in its first ten years. That figure will almost certainly be adjusted upward, because Medicare has a long history of outstripping “official” spending projections. The long-term outlook is even less rosy. The program created an unfunded liability larger than the unfunded liability of the entire Social Security program.

Finally, the program was enacted under an ethical cloud. From June through November 2003, the Bush administration intentionally and repeatedly withheld from Congress its projections that the program would cost up to 50 percent more than Congress believed. When the program was brought to a final vote on the House floor it was initially defeated, but GOP leaders held the vote open for three hours (rather than the usual 15 minutes) until they changed the outcome. Then they shut the vote down.

Beyond the cost to taxpayers, the program will have additional harmful effects. It will reduce saving, because when government assumes responsibility for workers’ retirement needs, workers shift income from savings to consumption.

It will lead to moral hazard. More employers and unions will make promises that they can’t keep because they will reasonably expect the federal government to bail them out, as it did with this program. And the program will increase prices for drugs, inviting government price controls that would ration drugs for the today’s patients and deny new cures to future generations.

Finally, the Medicare drug program will eliminate jobs and reduce economic growth. My colleague Jagadeesh Gokhale estimates that with this program in place, we would have to increase the Medicare payroll tax immediately and permanently from 2.9 percent to 17.8 percent of all wages to pay for all future Medicare benefits.

The Bush administration had a duty to tell the public about the full cost of this program. The House leadership had a duty — affirmed in their own Contract with America — “to restore the bonds of trust between the people and their elected representatives” and to give every bill “a clear and fair vote.” Those duties were breached. A law with the magnitude, scope, and cost of the Medicare drug program should have received a full and open debate. It did not.

This program passed the House 220 to 215. So far, two House members who voted “yea” have advocated delaying implementation, which narrows the program’s margin to one vote. Many more House Republicans privately acknowledge that the program is a mistake they wish they could undo.

If lawmakers want to aid the victims of Hurricane Katrina and do right by future generations, the time to undo that mistake is now. Duty demands they scrap the Medicare drug program, and return to the drawing board.

Michael F. Cannon is director of health policy studies at the nonpartisan Cato Institute and coauthor of Healthy Competition: What’s Holding Back Health Care and How to Free It (September, 2005).