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Why Any Deal to Cut Social Security, Medicare or Medicaid Would be a Moral, Economic and Political Disaster

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Friday, the Democratic group Third Way published a memo arguing that Democrats should support "entitlement reform" -- by which they mean cuts in Social Security, Medicare and Medicaid. I don't doubt the sincerity or intentions of their proposal, but I believe that if Democrats took their advice it would result in a moral, economic and political disaster.

Here's why:

The immorality of "entitlement reform." The very idea that seniors on Social Security -- whose median income is $18,000 a year -- should be asked to tighten their belts while the Federal Government still gives huge tax breaks to millionaires and subsidies to oil companies is just plain wrong.

The principle voices for "entitlement reform" are the multimillionaires from Wall Street who argue that we need to cut Social Security and Medicare benefits as part of a bargain to reduce the long-term federal deficit and give the "markets" confidence. Never mind that Social Security in particular does not contribute anything to the deficit and has in fact generated a $2.6 trillion surplus that was paid for by workers and employers through Social Security taxes. Never mind that the Wall Street gang clamoring for "entitlement reform" demanded extension of the Bush tax cuts for the wealthy, subsidies for the oil companies, tax breaks for companies that send jobs overseas and an end to the estate tax that only affects the sons and daughters of multimillionaires.

Never mind that many of those who promote "entitlement reform" rake in millions from the fruits of their coupon clipping and are taxed only 15% -- while ordinary middle class people pay twice that much on income earned by actually working for a living.

Last year John Paulson made a record $5 billion in personal income as the manager of a hedge fund. Had he somehow managed to make that astronomical sum of money laying bricks or sweeping floors, he would have paid taxes at a rate of 35% on the bulk of his income. Instead, he paid at a rate of only 15%, since he earned his money by speculating as a hedge fund manager instead of making a useful good or service.

The average Social Security benefit paid to a retiree is $14,000 per year. John Paulson -- who received a multi-billion dollar tax break compared to ordinary working Americans -- made as much last year as the total paid to 357,142 average Social Security beneficiaries. And we're asking Social Security beneficiaries to "tighten their belts"? That's just plain wrong.

By the way, a Federal report issued at the end of last week found that corporations made more in profits in the last quarter of 2010 than at any other time in the history of the United States. That, of course, was far from the case for middle class incomes.

For the last twenty years, middle class incomes have stagnated at the same time all of our very considerable increase in Gross Domestic Product has gone to the top 2% of the population. Middle class people shouldn't be asked to pay to fix the fiscal mess that was caused by massive tax cuts to the rich, two Republican wars and the collapse of the financial markets caused by the recklessness of the big Wall Street banks. The middle class has suffered enough from the Republican policies designed by their friends on Wall Street. Those who had the party should be asked to pay the bill. The notion that middle class people -- and those who aspire to the middle class -- should be asked to sacrifice while the wealthy few are getting richer and richer is simply obscene.

"Entitlement Reform" is bad economics. The principle long-term structural problem in the U.S. economy is the demise of the middle class. Long-term economic growth requires that the incomes of ordinary Americans increase in proportion to the increased productivity of the economy. Otherwise, consumers will not have enough money to buy the goods and services produced by the economy and the result will, once again, be economic collapse. That "demand deficit" is precisely what caused the Great Recession.

Middle class wages over the last two decades did not keep pace with increases in productivity. Every dime of growth in the GDP was siphoned off to the financial sector and the wealthy. For a time, this demand deficit was filled with a credit bubble. But when that bubble ultimately burst, the house of cards came tumbling down.

Long-term economic growth requires that prosperity be widely shared. And that is not the least bit inconsistent with the need to close a long-term structural Federal deficit.

My wife, Congresswoman Jan Schakowsky, who served on President Obama's Fiscal Commission, proposed a comprehensive plan to bring the deficit into primary balance without asking the middle class to pay by cutting Social Security, Medicare or Medicaid. Instead, deficit reduction is achieved by raising taxes on the wealthy; requiring those who make their income from investments to pay the same tax rate as those who make their money by working; controlling the costs of health care with a Public Option; requiring Medicare to negotiate with the pharmaceutical companies for lower drug prices; making modest cuts in military spending; and eliminating many tax expenditures to special interests such as subsidies to the big oil companies.

More recently she has also proposed creating new tax rates for millionaires and billionaires. At the moment the top tax rate is for all income above $375,000. The tax code currently makes no distinction between upper middle class and our nation's economic royalty that makes millions. Jan's proposal would create five new brackets beginning at one million and topping out at a billion.

If it were implemented this year, it would raise $78 billion -- more than the $61 billion reduction sought by the Republicans. And it would do this while assuring that the highest rate (for billionaires) is still below the highest tax rate under Ronald Reagan.

Those who wring their hands about the long-term budget deficit act as if the deficit problem is intractable, and conveniently forget that only a decade ago President Clinton left office with federal surpluses as far as the eye could see. Those surpluses were squandered away by George Bush and the Republicans on two wars, and tax breaks for the wealthy.

The question is not how to reduce the deficit, it is who pays to reduce the deficit.

And the "who pays" question is not just a question of morality, it is a question of economics. Economic inequality in the United States is higher today than at any time since 1928 -- before the last great economic collapse. The last thing our economy needs is a "deficit deal" that shifts even more income and buying power away from ordinary middle class Americans and into the hands of the wealthy. That would be a formula for economic stagnation and decline. And that would be precisely the effect of cutting Social Security, Medicare or Medicaid benefits.

From an economic point of view, the facts are clear. We can cut the Federal budget deficit without increasing the "demand deficit" by cutting the incomes of retirees, the disabled and lower income working people.

And let's be clear: all of the proposals for "entitlement reform" would, in fact, cut the incomes of ordinary Americans. Let's look at a few:

Raising the Social Security retirement age to 70 for future retirees. This proposal would amount to an effective cut of about 20% in average Social Security benefits received by future retirees. Some people say that since life expectancy is increasing we should raise the age of retirement. That's easy to say if you're a lawyer or stock-broker -- not so easy if you're a bricklayer or a maid who flips beds for a living. By the way, the numbers show that life expectancy has increased mainly for high-income people.

Privatizing Social Security. This proposal -- which was soundly defeated when George Bush proposed it in 2005 -- has been resurrected by the Republicans. It would destroy Social Security as we know it and replace it with a risky investment scheme that turned over the Social Security Trust Fund to Wall Street. Of course getting their hands on the Social Security Trust fund is the major reasons why "privatization" is promoted by the same "masters of the universe" whose reckless speculation collapsed the economy and cost 8 million Americans their jobs. It would trade the guaranteed benefit of Social Security for a bet on the stock market. If you happened to retire when the stock market lost 45% as it did in 2008, you're just out of luck.

Replacing Medicare with a "voucher" system. This is one of the major elements of Republican Budget Chairman Paul Ryan's "Road Map." The idea here is to give seniors a fixed value voucher and tell them to go shop the private insurance market. If private insurance companies raised rates, then seniors would have to come up with the difference. Instead of being a health insurance plan that seniors can count on to cover their needs like Medicare, it would become a "defined contribution" plan where the Medicare Trust fund would make a fixed contribution to your health insurance costs without any guarantee that you could find a plan comparable to traditional Medicare.

This proposal is supposed to be a way to "control" health care costs. Of course it does nothing of the sort. Instead, it controls federal expenditures on health care by shifting increases in costs to seniors. This is not cost control -- it is cost shifting. In fact, it would increase overall expenditures on health care in the economy by replacing the most efficient insurance system in existence -- traditional Medicare -- with private insurance companies that have massively higher administrative costs -- plus take a profit. And we're not talking about small differences in overhead. Medicare spends about 2% of every health care dollar on administration. Private insurers spend from 15% to 30% -- or more -- of every dollar on administration and other non-medical costs like marketing and profit.

In fact, a General Accounting Office report found that in 2006, Medicare Advantage plans -- the part of Medicare that already involves private insurance plans -- spent only 83.3 percent of their revenue on medical expenses, with 10.1 percent going to non-medical expenses and 6.6 percent to profits. That's 16.7 percent administrative share compared to 2% for the traditional Medicare that does not involve private insurance companies.

The bottom line is simple: replacing Medicare with vouchers for private insurance would shift costs to seniors and increase overall costs by allowing private insurance companies to take a chunk of every dollar without adding any value whatsoever.

Turning Medicaid into a block grant to the states. In this case, the plan would be to control federal outlays on health care for low-income Americans -- and nursing homes for the seniors and disabled -- by shifting the burden to the states. The states could then either ante up more cash when health care costs rose -- or they could simply cut benefits and shift costs to low-income working people. If the states came up with the additional money, a higher percentage would be coming from middle class Americans, since most state tax systems rely on sources that are less progressive than the Federal income tax. If they chose to simply cut benefits, the burden would also fall squarely on ordinary Americans.

A group that would be especially hard hit would be middle class seniors who need nursing home care, since a third of Medicaid dollars goes to pay for long-term care. Much of that burden would ultimately fall on their children and families, who would be forced to come up with the money or watch their loved one be thrown out of the nursing home.

And once again, the plan to turn Medicaid into a block grant would do absolutely nothing to control health care costs. It would only shift those costs to everyday Americans and go a long way to undo the expansion of coverage to millions under the new Affordable Care Act.

Social Security, Medicare and Medicaid are three crucial progressive achievements that have marked major mileposts along America's journey to realize our core values. Democrats have to be clear: we won't go back.

"Entitlement Reform" would spell political disaster for Democrats. The Third Way memo argues that next year's election will be about "deficits." That's just non-sense.

First, a recent CBS News poll found that 51% of Americans say the economy and jobs are the most important problem facing our country today -- but just 7% cited the budget deficit.

But more fundamentally, elections are never "about issues." Swing voters make their decisions based on their evaluations of the qualities of the competing candidates. People vote about whether a candidate is on their side, strongly committed to core values, a strong effective leader, self-confident, respectful -- whether she or he inspires them.

Issues often become symbols in the voters' minds of whether a candidate is "on their side" or "a strong effective leader." But elections are never "about" an issue. They are about candidates.

Last year Democrats were thrown out of office because people were sick of an economy that had become worse and worse for them. As a consequence, many swing voters decided that Democrats weren't on their side. If the economy had been roaring back from recession, they would have voted differently. Their positions on deficits, or Federal spending, would have made very little difference because they are abstractions that have no direct, palpable impact on individual voters or their families.

On the other hand if a voter becomes convinced that a candidate actually intends to take something away that they value -- to cut their Social Security or Medicare benefits, for instance -- they will decide in a nano-second that the candidate advocating that position is not on their side. That is particularly true because most Americans believe that they are owed their Social Security and Medicare benefits since they have paid throughout their working lives into Social Security and Medicare. Voters don't view Social Security and Medicare just as "government programs." They view them as "insurance programs." Americans believe they deserve Social Security and Medicare benefits just as they would the benefits owed under any other insurance contract.

The notion that independent voters will some how be swayed by an abstraction like a "deficit deal" is a fantasy that must have been dreamed up by folks who spend all of their time talking to other policy wonks inside the beltway -- certainly not someone who has experience with real world electoral politics.

The Third Way memo argues that seniors rarely break for Democrats anyway. Precisely. President Obama won in 2008 while losing seniors by eight points. Last fall, Democrats lost seniors by 21 points. The President can win re-election while losing seniors by 8 points - but not by 21. The election passes through states with old populations - like Pennsylvania, Ohio, Michigan, Wisconsin, and Florida.

A decent chunk of seniors who voted against Democrats last year have to be convinced that Democratic candidates are on their side in 2012, or Democrats are toast. If they see Democrats bargain away their Social Security, Medicare and Medicaid benefits -- or those of their kids -- they won't vote Democratic in November of 2012. It's that simple.

The polling shows clearly that the voters oppose cuts in in Social Security, Medicare and Medicaid.

• The public opposes cutting Social Security benefits by 70% to 80%.
• Two-thirds of likely voters oppose raising the retirement age.
• Up to two-thirds support making the Social Security Trust fund solvent for generations by raising the payroll tax to cover income above $107,000 a year.

A memo last week from Democracy Corps summarized the findings of a survey they conducted in 50 of the most competitive Republican-held Congressional districts -- nearly all of which gave a majority to Obama in the last presidential election.

In November, Republicans won these districts by 11 points. Now, as they've got to know them in practice, their lead has shrunk to two -- a loss of 9 points.

Under 40 percent of the electorate in these districts sees their incumbents as "on their side."

Democracy Corps reports that the more these voters learn of the Republican budget in a balanced debate, the less they like it. Just 46 percent of voters in these Republican districts support the GOP plan to cut $61 billion, and by 48 to 40 percent, voters there say they are less likely to support the incumbent if the incumbent backs the Tea Party agenda.

Another poll found that 37% of Americans agreed with Democrats' approach to cutting spending as opposed to 25% for Republicans.

One of the reasons is that as Americans have begun to look at Republican budget proposals up close -- in the concrete, not the abstract. They don't like what they see. That's especially true when they hear that Republicans want to cut things that are important to them, at the same time they give tax cuts to the rich, or subsidies to oil companies. To voters this means that the problem isn't that we're "broke" -- as House Speaker Boehner claims -- but rather that the Republicans give priority to the wealthy and big corporations instead of their needs.

Contrary to much inside-the-beltway opinion, a recent NBC/Wall Street Journal poll showed that a 51% to 46% majority says the government should do more, rather than less.

It found that by 54% to 18%, Americans do not believe that cuts in Medicare are necessary to reduce the deficit. Forty-nine to twenty-two percent say cuts in Social Security are not needed. Fifty-six percent say cuts in Headstart programs are "mostly" or "totally unacceptable." Seventy-seven percent say the same of cuts in primary and secondary education. Majorities also call unacceptable cuts to defense, unemployment insurance, student loans, and heating assistance to low-income families.

On the other hand, while Republicans rail against increases in taxes -- even for the rich -- a whopping 81% favor placing a surtax on people who make more than a million dollars. Sixty-eight percent want to end the Bush tax cuts on those who make over $250,000.

Many "deficit hawks" argue that we have to "get real" and "make the tough choices" to balance the budget. How about we really get real and deal with the deficit using the approaches supported by the American people: increasing taxes on millionaires, or cutting tax subsidies to special interests like oil companies -- not by cutting Social Security, Medicare and Medicaid benefits.

Fortunately, a lot of major Democrats get the picture. Today, Senate Democratic Leader Harry Reid will hold a "Back Off Social Security" event at the Capitol with senior groups and a large group of his colleagues.

They realize that any long term "deal" with Republicans over entitlements this year would inevitably erode Social Security, Medicare and Medicaid benefits because it must pass a House that is now dominated by the Tea Party. That is simply unacceptable.

Democratic acquiescence to any deal that cuts in Social Security, Medicare and Medicaid would be a moral, economic and political disaster.

The Democratic message on entitlements should be simple and clear: to paraphrase the late Charlton Heston -- you will have to take cuts in Social Security, Medicare and Medicaid benefits out of our cold, dead hands.

Robert Creamer is a long-time political organizer and strategist, and author of the book: Stand Up Straight: How Progressives Can Win, available on Amazon.com. Follow him on Twitter @rbcreamer.