Medicaid needs reform, not expansion. This federal–state health care program provides health care to over 60 million Americans and consumes a growing portion of state and federal budgets. Research shows a long history of Medicaid enrollees having worse access and outcomes than privately insured individuals.[1] Due in part to low reimbursement, one in three doctors refuses to accept new Medicaid patients.[2] Despite access issues, Medicaid spending continues to grow. In 2010, total federal and state spending on Medicaid exceeded $400 billion.[3]

Instead of reforming Medicaid, the Patient Protection and Affordable Care Act (Obamacare) expands eligibility to all individuals earning less than 138 percent of the federal poverty level (FPL).[4] The Medicaid program is already struggling to provide care to its core obligations—a diverse group of low-income children, disabled, pregnant women, and seniors. Adding more people further exacerbates Medicaid’s underlying problems.

The expansion of Medicaid fuels a larger trend under Obamacare: government coverage supplanting private coverage. By 2021, 46 percent of all Americans will be dependent on the government for their health care. Of this group, 86.9 million will be on Medicaid/Children’s Health Insurance Program (CHIP), followed by 64.3 million on Medicare and 23.4 million enrolled in government exchanges.[5] This will push U.S. health care closer to a government model.

The Temptation of Medicaid Expansion

Obamacare provides additional federal funding to the states for this new expansion population. Starting in 2014, the federal government would pick up 100 percent of the benefit costs for the newly eligible population for three years. Thereafter, this enhanced federal funding would gradually decline to 90 percent in 2020.

Obamacare also directed states to expand eligibility or risk forgoing all of their federal Medicaid dollars. The Supreme Court, however, ruled on behalf of 26 state plaintiffs that this “all-or-nothing” proposition was coercive. To rectify this, the Court essentially made the expansion optional, meaning that a state could reject the expansion but not lose its existing Medicaid funding.

Today, governors and state legislators are weighing this option as they develop their budgets for the coming year. Proponents use a variety of unrealistic arguments in support of the Medicaid expansion:

• It provides states with an influx of new, generous federal revenue. This will cause states to spend money that they otherwise would not have spent. Moreover, due to the structure of Obamacare, states will likely have to absorb many currently eligible but not enrolled individuals as well as those who lose their existing employer coverage. These effects would add to the cost.[6]
• It will result in savings as the cost of uncompensated care declines with expanded coverage. Heritage data analysis shows that in the first few years, when federal funding is at its peak, states may see some savings. Over time, however, in the majority of states, Medicaid spending will accelerate and dwarf any projected uncompensated care savings.[7] These savings are also contingent on states enacting legislation to further reduce uncompensated care funds (Disproportionate Share Hospital [DSH] payments) on top of the $18 billion of federal cuts enacted under Obamacare. Heritage analyst Ed Haislmaier predicts that “governors and state legislators should expect their state’s hospitals and clinics to lobby them for more—not less—state funding to replace cuts in federal DSH payments.”[8]
  Finally, contrary to the theory that expanding Medicaid would cause the number of uninsured to decline and reduce the need for uncompensated care, a similar expansion in Maine found the opposite effect. In Maine, uncompensated care increased, and the number of uninsured in the targeted population (those below 100 percent of FPL) saw limited change.[9]
• Rejecting the expansion will mean that other states get more. The federal share of Medicaid is based on a formula calculation and actual expenditures. Rejected funds do not go into a general fund for redistribution to other states. The fewer states that expand, the less the federal government spends. States that draw down on these new federal funds fuel the fiscal crisis in our country.

The Trade-Off Dilemma

Committing to an expansion creates a dilemma for the states. To control Medicaid spending, states typically fall back on predictable techniques to manage costs, such as limiting reimbursements to health care providers and limiting services, which ultimately limits access to care. These Medicaid cost controls, however, go only so far. Today, Medicaid consumes over 23 percent of state budgets, surpassing education as the largest state budget item.[10] As Medicaid spending continues to rise, other important state priorities such as education, emergency services, transportation, and criminal justice are squeezed.

Finally, if states resist balancing among spending programs, the alternative is generating more revenues with tax increases. But higher taxes come with a steep price: They reduce economic growth. With most states still experiencing anemic growth, tax increases on top of already higher taxes at the federal level are not an appealing option.[11]

Fueling the Country’s Fiscal Crisis

Any positive assumptions about Medicaid expansion also assume that federal funding remains unchanged. With deficits running over $1 trillion a year, the country’s fiscal future is in need of reform. Federal spending on health care entitlements, including Medicare and Medicaid, is the largest driver.[12]

Even this Administration recognizes that such entitlement spending, including Medicaid, is unsustainable. The President’s fiscal year (FY) 2011 budget outlined several Medicaid reform policies, including setting an across-the-board blend rate for federal reimbursement and limiting the states’ ability to leverage provider taxes for the state share of matching funds. Although the Administration attempts to distance itself from its own proposal, any serious efforts toward entitlement reform must include Medicaid.

In spite of this fact, several Democrat and Republican governors that support Medicaid expansion condition their support on federal funding remaining untouched. In essence, pro-expansion governors are telling Washington, “don’t touch entitlement spending.” This reliance on federal revenues exacerbates the country’s fiscal challenges and could also affect states’ own fiscal health. Recently, Moody’s cited Missouri’s reliance on the federal government, including Medicaid funding, as adversely affecting its credit rating outlook.[13]

Setting Good Policy

There are several recommendations that the states and Congress could adopt to help mitigate the crisis that Obamacare has exacerbated:

• Reject the Medicaid expansion. Greater dependence on federal dollars tangles the states in bad fiscal policy and bad health care policy. States that reject the expansion avoid relying on unsound federal revenues, stretching an already thin program beyond its means and adding millions to a failing program.
• Scale back existing eligibility where possible. Some states have allowed Medicaid to grow beyond its original intent by moving middle-class families into a welfare program. To restore Medicaid as a safety-net program, states should review eligibility levels, scale back eligibility where possible, and restore the program’s focus on its core Medicaid functions.
• Advance a separate, state alternative. Instead of using a flawed Obamacare model, states should put in place an alternative. States should develop a state solution tailored to the specific needs of this new population rather than placing them in a one-size-fits-all Medicaid option.[14] A non-Medicaid, state-based approach, especially for this targeted population, would give states the control to design policies best suited to addressing the needs of their citizens without onerous Medicaid constraints.
• Congress should eliminate the federal enhanced Medicaid match. To avoid the argument that states rejecting Medicaid are leaving federal dollars on the table, Congress should level the playing field by removing the new, enhanced federal dollars. This would remove/minimize the temptation of excessive and unsustainable federal funding and restore fiscal constraint at the federal level. States would still be able to expand eligibility but would have to do so with the traditional (non-enhanced) federal matching rate. If Congress ignores this opportunity to restrain federal spending, it could “block grant” the enhanced federal dollars to the states to develop their own state-specific approaches, including alternatives outside of Medicaid.

Alternate Solution Needed

Medicaid is already spread too thin. Adding a new and complex population to this program does not solve its challenges; it only makes them worse. States should resist, and Congress should remove, this temptation. Both should begin to lay out a better and more sustainable alternative than a failing government health program to care for the less fortunate.

—Nina Owcharenko is Director of the Center for Health Policy Studies and Preston A. Wells, Jr., Fellow at The Heritage Foundation.

[1]Kevin Dayaratna, “Studies Show Medicaid Patients Have Worse Access and Outcomes than the Privately Insured,” Heritage Foundation Backgrounder No. 2740, November 7, 2012, http://www.heritage.org/research/reports/2012/11/studies-show-medicaid-patients-have-worse-access-and-outcomes-than-the-privately-insured. 

[2]Sandra L. Decker, “In 2011 Nearly One-Third of Physicians Said They Would Not Accept New Medicaid Patients, But Rising Fees May Help,” Health Affairs, Vol. 31, No. 8 (August 2012), pp.1673–1679, http://content.healthaffairs.org/content/31/8/1673.abstract (accessed March 4, 2013).

[3]Centers for Medicare and Medicaid Services, 2011 Actuarial Report on the Financial Outlook for Medicaid,March 16, 2012, p. 19, http://www.cms.gov/Research-Statistics-Data-and-Systems/Research/ActuarialStudies/Downloads/MedicaidReport2011.pdf (accessed March 4, 2013).

[4]An estimated 66 million people are below 138 percent of the federal poverty level.

[5]Centers for Medicare and Medicaid Services, National Health Expenditure Projections 2011–2021, Table 17, http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/Downloads/Proj2011PDF.pdf (accessed March 4, 2013).

[6]Edmund F. Haislmaier and Brian Blase, “Obamacare: Impact on the States,” Heritage Foundation Backgrounder No. 2433, July 1, 2010, http://www.heritage.org/research/reports/2010/07/obamacare-impact-on-states.

[7]Drew Gonshowroski, “Obamacare and the Medicaid Expansion: How Does Your State Fare?” The Heritage Foundation, The Foundry, March 5, 2013, http://blog.heritage.org/2013/03/05/obamacare-medicaid-expansion-state-by-state-charts.

[8]Edmund F. Haislmaier, “Deconstructing State ‘Savings’ from Expanding Medicaid,” Heritage Foundation Commentary, September 25, 2012, http://www.heritage.org/research/commentary/2012/09/deconstructing-state-savings-from-expanding-medicaid.

[9]Mary Mayhew, testimony before Florida Senate Select Committee on Patient Protection and Affordable Care Act, February 11, 2013, http://www.flsenate.gov/PublishedContent/Committees/2012-2014/SPPA/MeetingRecords/MeetingPacket_2026.pdf (accessed March 4, 2013).

[10]National Governors Association and National Association of State Budget Officers, “The Fiscal Survey of the States,” Fall 2012, p. 26, http://www.nasbo.org/sites/default/files/Fall%202012%20Fiscal%20Survey_Final%20Version.pdf (accessed March 4, 2013).

[11]J. D. Foster, “Tax Policy: Obama Is Still Wrong on Tax Rates,” Heritage Foundation Issue Brief No. 3781, November 26, 2012, http://www.heritage.org/research/reports/2012/11/tax-policy-obama-is-still-wrong-on-tax-rates.

[12]“Tax Revenue Devoured by Medicare, Medicaid, and Social Security in 2045,” Heritage Foundation Federal Budget in Pictures, http://www.heritage.org/federalbudget/entitlements-historical-tax-levels.

[13]David Lieb, “Missouri Senators Cite Credit Concerns About Medicaid,” The Kansas City Star, February 11, 2013, http://www.kansascity.com/2013/02/11/4061211/missouri-senators-cite-credit.html (accessed March 4, 2013).

[14]States could adapt and modify existing frameworks, such as Healthy Indiana, as a stand-alone option. Merrill Mathews and Mark E. Litow, “Bad Medicaid Program Gets Worse Under Obamacare,” Investor’s Business Daily, February 26, 2013, http://news.investors.com/ibd-editorials-viewpoint/022613-645817-medicaid-still-out-of-control-despite-obamacare.htm (accessed March 4, 2013).  

Governments regularly run fiscal deficits and periodically awake to the need to restore balance to their finances. These episodes of “fiscal correction” or “austerity” may emphasize either tax increases or spending cuts. As the United States faces an out-of-control budget deficit and trillions in unfunded promises to future retirees, the question looms large: Tax more, spend less, or do some of both?

Economists Alberto Alesina, Carlo Favero, and Francesco Giavazzi explore this question in a current working paper.[1] Specifically, they ask whether tax-based or spending-based fiscal corrections lead more rapidly to economic growth.

Fiscal Corrections Needed

The U.S. and other advanced economies are in need of fiscal correction. A paper published by the Organization for Economic Co-operation and Development (OECD) estimates that in order to reach a goal of reducing debt to 60 percent of gross domestic product (GDP) by 2025, the U.S. requires the third-largest fiscal correction of the 21 countries measured.[2]

The author, Robert Hagemann, looked at the prospects for fiscal correction in the OECD report and identified income transfers, health expenditures, government wages, and education expenditures as the largest components of government budgets. The U.S. is close to average in terms of spending on these components among OECD countries. On the revenue side, Hagemann notes the expansiveness of exemptions, credits, and deductions in the tax codes of OECD countries, especially the U.S.

In a richly descriptive paper, Alesina and Silvia Ardagna dissect fiscal corrections in 21 countries since 1970.[3] They find that half of attempted adjustments failed to lower the debt-to-GDP ratio. Spending-based adjustments were more likely to succeed and more likely to lead to economic growth; tax-based adjustments were more likely to fail in their basic purpose.

Looking at 17 advanced economies from 1978–2009, Pete Devries, Jaime Guajardo, Daniel Leigh, and Andrea Pescatori document 173 fiscal corrections.[4] For each country and year, they cite evidence on the reasons stated for the policies and the specific mix of spending cuts and tax increases in each case. In the U.S., they note five years with tax-based budget tightening between 1978 and 1986 and 10 years of spending-based correction from 1988 to 1998.

The Effect on Economic Growth

Alesina, Favero, and Giavazzi use the dataset compiled by Devries, Guajardo, Leigh, and Pescatori and quantitatively take account of multi-year fiscal plans as initially announced. Of course, governments do not always follow through on initially announced plans, and the authors also quantify deviations from the announcements. Thus, each “plan” consists of announced and unannounced policy changes across a series of years.

Alesina, Favero, and Giavazzi then categorize each plan as tax-based or spending-based. One criticism of their approach is that they use a binary approach instead of taking the specific tax-and-spending mix into account.

The authors then use data to estimate the effects of the plans on economic growth. They find that tax-based corrections lead to extended recessions enduring at least three years. By contrast, spending-based corrections are followed by mild recessions, with recovery following within a year.

In order to check the robustness of their result, Alesina, Favero, and Giavazzi test each country separately. They check whether tax-based corrections are more likely to be used during a recession, examine monetary policy as an additional explanation, and control for global conditions. None of these robustness checks alters their main conclusion: Spending cuts do much less damage to growth than tax increases.

Deficits and Taxes Both Diminish Investment

Examining the components of GDP, Alesina, Favero, and Giavazzi find that the difference between tax-based and spending-based corrections is driven by investment. While private consumption behaves similarly in both cases, investment falls much more in response to a tax-based correction.

Why does investment react so much differently in the two cases? According to the economic theory of crowding out, government borrowing falls in a fiscal correction, releasing more funds to be used for investment. In a tax-based correction, however, this effect is offset by the increase in taxation, which makes investment opportunities less attractive, discourages competition, and induces investors to take their money overseas.

Policy Implications

The U.S. and other economies facing a potential debt crisis need to consider carefully the relative impacts of cutting government spending or raising taxes.

If the federal government attempted to balance its budget using large tax increases, international experience suggests that an extended recession would follow. If recent recessions are any indication, a new recession would lead to large automatic and discretionary increases in government spending, which would use up the new tax revenue without dealing decisively with the deficit. That was the experience of many countries analyzed by Alesina and Ardagna: Despite higher taxes, debt-to-GDP ratios did not shrink.

A spending-based fiscal correction, on the other hand, might have mild recessionary effects, according to the authors, but would quickly give way to growth. Keep in mind that GDP is the sum of consumption, investment, government spending, and net exports. Thus, any decrease in government spending is “baked in” as a decrease in GDP, even if it has no effect on the rest of the economy. Alesina, Favero, and Giavazzi’s results imply that the void left by decreased government spending is filled within a year by increased investment and consumption, and the economy continues growing.

These studies suggest that both economic growth and smaller deficits are necessary to achieve long-term budget stability in the U.S. Smaller government can achieve the latter without endangering the former.

Summary of Findings

The studies cited above find some predictable conclusions regarding the use of spending cuts and tax increases in fiscal corrections, including:

• Attempted deficit reductions, or “fiscal consolidations,” have historically been undertaken as multi-year plans with mixes of spending cuts and tax increases. Different approaches have yielded different results.
• Fiscal consolidations that emphasize spending cuts are more likely to reduce debt and less likely to lead to recession.
• Fiscal consolidations that emphasize tax increases have a strong, negative effect on investment, diminishing the productive capacity of the economy.
• About half of attempted deficit reductions fail, typically those with greater tax increases and smaller spending cuts.

Evidence in History

Amid the ongoing debate over how to stabilize the finances of the federal government in the long run, policymakers should keep in mind that this has been done before both in the U.S. and abroad. Many years of evidence indicate that spending-based fiscal consolidation is more effective at reducing debt and less likely to cause a recession. The last balanced budgets in the U.S. resulted from a long sequence of spending cuts from 1988 to 1998, allowing a sustained surge of economic growth. As government shrank and the risks associated with high government debt receded, innovation, private investment, and take-home wages soared. Let’s try that again.

—Salim Furth, PhD, is Senior Policy Analyst in Macroeconomics in the Center for Data Analysis at The Heritage Foundation.

[1]Alberto Alesina, Carlo Favero, and Francesco Giavazzi, “The Output Effect of Fiscal Consolidations,” National Bureau of Economic Research Working Paper No. 18336, August 2012, http://www.nber.org/papers/w18336 (accessed March 5, 2013).

[2]Robert Hagemann, “Fiscal Consolidation: Part 6. What Are the Best Policy Instruments for Fiscal Consolidation?” OECD Economics Department Working Paper No. 937, January 2012, http://dx.doi.org/10.1787/5k9h28kd17xn-en  (accessed August 31, 2012).

[3]Alberto Alesina and Silvia Ardagna, “The Design of Fiscal Adjustments,” Harvard University working paper, September 2012, http://www.economics.harvard.edu/faculty/alesina/files/The%2Bdesign%2Bof%2Bfiscal%2Badjustments%2BSept%2B2012.pdf (accessed March 5, 2013).

[4]Pete Devries, Jaime Guajardo, Daniel Leigh, and Andrea Pescatori, “A New Action-Based Dataset of Fiscal Consolidation,” International Monetary Fund Working Paper No. WP/11/128, June 2011, http://www.imf.org/external/pubs/ft/wp/2011/wp11128.pdf (accessed September 4, 2012).

Because the word “sequester” sounds more like a bronchial infection than a governmental disaster, President Obama failed to terrorize House Republicans into raising taxes in order to avoid it.

They tried everything they could think of to scare us. We’d have meat shortages because federal inspectors would be laid off, long lines at airport security stations would get longer because the TSA molesters would be cut back. Education Secretary Arne Duncan earned four “Pinocchios” from the Washington Post’s Fact Checker column for brazenly lying about teachers he said were already being laid off in West Virginia.

Duncan, for all his faults, is relatively harmless. The same cannot be said about Homeland Security Secretary Janet Napolitano, whose department has begun releasing criminal illegal aliens — which for this discussion is not redundant — from the jails where they were being held pending deportation. Even before Friday, when the $85 billion in cuts took effect, Napolitano’s Immigration and Customs Enforcement began releasing criminal illegal aliens among the public.

It’s the Obama administration’s “sequester amnesty,” which endangers the public to make a political point.

Pinal County, Arizona, is about seventy miles from the Mexican border. It’s larger than Connecticut, running south and east from the city of Mesa. Its sheriff, Paul Babeu, is a tough guy in a very tough place. And both his job and his county are made a lot tougher by ICE’s release of an unknown number of these criminal illegals, people who were held pending deportation because their criminal records made them “inadmissible” into the United States.

Arizona is high on Obama’s list of enemies. It’s the state Obama’s Justice Department sued to set aside the state law that enables the arrest and detention of illegal aliens. The Supreme Court struck down part of the law, but left in place the part that allows state law enforcement officers to check the immigration status of people they’ve stopped for other reasons.

Obama’s position is that federal law preempts any state law to control illegal immigration and any state action for which the state lacks federal permission is impermissible.

Sheriff Paul Babeu of Pinal County, Arizona, is trying to deal with that one-way street. I interviewed him on the Roger Hedgecock radio show last Thursday. What Sheriff Babeu told me is shocking. It confirms that our government is now willing to endanger public safety to prove a political point.

In December 2012, Homeland Security’s Immigration and Customs Enforcement agency had more than 33,000 illegal aliens in custody pending deportation. These aren’t people who were arrested just because they were illegal aliens. They are criminals, held by ICE because they were convicted of separate crimes, usually serious felonies, and held after they’d served their sentences until they could be deported. Others have long criminal records in their own countries who came here to do more of what they did at home.

Federal law allows these people to be held for up to six months pending deportation. Some, from nations such as Pakistan, are held for that long — and should be held longer – because their country of origin won’t issue travel documents enabling their return. The non-cooperating nations are content to leave their problems with us, be they terrorists or drug traffickers.

The federal government says there are 11 to 12 million illegals in the United States. Sheriff Babeu told me that 300-500 of the 34,000 criminal illegals held in pre-deportation detention were released into his county two weekends ago.

Janet Napolitano said that ICE won’t be able to maintain 34,000 criminal illegals in custody — not because of legal limitations on incarceration, but because of the sequester. In a statement to the press last week, she said, “Look, we’re doing our very best to minimize the impacts of sequester. But there’s only so much I can do,” Napolitano said. “I’m supposed to have 34,000 detention beds for immigration. How do I pay for those? We want to maintain 22,000-some odd Border Patrol agents. I got to be able to pay their salaries.”

Babeu told me that neither he nor the county’s police chiefs were given notice of the release. “The doors swung open and there they go,” he said.

I asked Babeu if he even knew who these people were. He said that he’s asked for that information numerous times, including by letter, and ICE has refused to tell him. “These people were released into the community. We don’t know their names, we don’t know what charges they were held on or their criminal history.” He added, “But we do know this: this is the same group that Janet Napolitano and Barack Obama have all agreed that these are the worst of the illegals.”

ICE is saying that some of these illegals were released on terms that supposedly provide some supervision. Sheriff Babeu is, to say the least, skeptical.

“They’re saying that they’re going to put them on supervised release, meaning some of them wear an ankle bracelet or they have to check in with authorities. Are you kidding me? These people have broken the law countless times and now they’ve got their chance. They’re out of prison.”

He added, “There’s no incentive for them to report in because what’s the worst thing we can do to them? Deport them?”

Sheriff Babeu apparently learned from ICE and Border Patrol agents who called him unofficially. He said, “Good people who work for ICE, work for Border Patrol, they call me all the time.…They said, ‘Sheriff, help us. We’re releasing all these criminals. This order just came down from Washington and now they’re all out in the streets.”

Which streets? It’s improbable that Pinal County is the only place where criminal illegals are being set free. He’s asked about that, too, and the federal bureaucrats won’t tell him.

So we don’t know how many criminal illegal aliens — criminals because they’ve committed serious crimes other than illegally entering the United States — are being set free around the country. According to an Associated Press report, Homeland Security has released over 2,000 of these dangerous illegals since February. Of the 34,000 held by ICE in December, how many more will be turned loose to endanger the American people, because the Obama regime wants to punish us for the sequestration of $85 billion out of the nearly $4 trillion the government will spend this year?

The release of criminal illegal aliens is probably illegal itself. Under our muddled immigration law, Napolitano has the authority to release illegal aliens individually when her department determines that they pose no danger to public safety. But mass releases, such as the one into Pinal County, are beyond her power.

The only answer to this is for Sheriff Babeu — perhaps joined by other concerned law enforcement officers around the country — to sue Napolitano to stop the releases. That lawsuit would reveal who the illegals are, what crimes they’ve committed before, and just who within ICE, the Justice Department, Homeland Security, or possibly the White House ordered the releases.

Congress won’t find the answers to these questions no matter how hard it tries. The House subpoena on “Fast and Furious” was blocked by Obama’s claim of executive privilege when Congress held Attorney General Holder in contempt. The Benghazi investigation is still incomplete, the survivors of the terrorist attack on our diplomatic outpost held — or, more technically, sequestered — out of congressional investigators’ reach.

The only answer is “sue the bastards.” Get a federal judge to issue an injunction against further releases and to compel answers to Babeu’s questions. He, and the rest of the law enforcement community, are entitled to know who was released, what crimes they had committed before, and where these people were when last seen. They have to know these things if they’re going to do their duty to protect their communities.

Gene Sperling, Obama’s top economic adviser, was wandering around the Sunday talk shows blaming Republicans for the sequester. He said Republicans are to blame for all the harm that results from the sequester. After Napolitano’s release of criminals from ICE incarceration, that’s a bolder lie than Arne Duncan’s.

We are living in an era of government lawlessness that is unprecedented in our history. Obama and his minions will do whatever they like, whenever they can, to make political points. In this case, only the courts can stop them.

(Reuters) The powerful U.S. gun rights lobby went on the offensive on Friday arguing that schools should have armed guards, on a day that Americans remembered the victims of the Newtown, Connecticut school massacre with a moment of silence.

“The only thing that stops a bad guy with a gun is a good guy with a gun,” said Wayne LaPierre, chief executive of the National Rifle Association, noting that banks and airports are patrolled by armed guards, while schools typically are not.

His remarks – in which he charged that the news media and violent video games shared blame for the second-deadliest school shooting in U.S. history – were twice interrupted by protesters who unfurled signs and shouted “stop the killing.”

A solution to the fiscal cliff should include changes to Social Security. Demands that Social Security should be taken off the table, such as those made by Senator Dick Durbin (D-IL)[1] and several others, are both misguided and wrong.

Although Social Security has a trust fund that will last for just over 20 years, it is already running massive cash-flow deficits that will last for at least the next 75 years. Repaying its trust fund bonds will take increasing amounts of general revenue taxes that will either squeeze other spending out or cause even higher deficits. And after the bonds run out, the program faces automatic 25 percent benefit cuts for every recipient.

As a solution is found to the fiscal cliff, policymakers should include the first steps toward fixing Social Security.

Social Security’s Grim Financial Picture

According to the Social Security Administration, Social Security has been running deficits since 2010 and owes $11.3 trillion[2] more in benefits over the next 75 years than it will receive in payroll taxes. In order to pay all of its promised benefits, Social Security will require massive annual injections of funding in addition to what the program receives from payroll taxes.

Social Security’s trust fund gives it the legal authority to receive general tax money to pay its benefits until about 2032. However, general revenue funds used to pay Social Security benefits would not be available to pay for anything else. That is why Social Security is part of the spending debate. And after 2032, Social Security benefits would be cut by about 25 percent.

There are three simple changes, two of which have wide bipartisan support, that should be included in any settlement.

1. Fix the Annual Inflation Adjustment

Social Security’s annual cost-of-living adjustment (COLA) protects retirees against inflation reducing the purchasing power of their monthly benefits. Thus, the index used to set the annual COLA should provide the most accurate estimate of inflation. However, Social Security does not use the best available inflation index.

The current index fails to account for changes in the way that people buy products and services when the prices of similar items change. For instance, if the price of gasoline goes up, while overall food prices drop, today’s inflation index assumes that consumers will buy the same amount of both gas and food. In reality of course, the amounts would change, as would the amounts of many other items as consumers seek to make the best use of their limited income dollars.

This more realistic type of behavior can be measured in a “chained” index, which has been available since 1999 and measures inflation for about 87 percent of the workforce. This more accurate measure shows that inflation is actually about 0.3 percentage points per year less than is shown by the index that Social Security uses.

Using this index instead of the current outdated index would better reflect the actual increases in inflation that affect seniors. It would result in real savings to Social Security, especially over time, while still protecting the value of seniors’ monthly benefits from being eroded by inflation. This more accurate measure would also reduce the cost of that protection to taxpayers.

Both the problem and its simple solution have been understood for decades. The improved index can be implemented quickly and without complication.

2. Increase the Full Retirement Age

On average, Americans are living longer than in the past. Some of this improvement is due to conquering childhood diseases and other causes of early death. For this reason, when discussing Social Security, the number that really matters is how much longer people who have reached age 65 will live. That statistic is a better estimate of how long they will collect benefits.

Facts from a number of government agencies all show that more people reach age 65, and once they do, they live longer now than they did in the past.[3] For example, the Centers for Disease Control says that just between 2000 and 2006, life expectancy for people who have reached age 65 increased by 0.9 years.[4]

Yet today’s Social Security–even after the coming increase in the full retirement age to 67–has not kept pace with longevity increases that have already happened. To reflect this reality, the full benefits age should be increased still further to age 68 or beyond and then indexed to future changes in longevity.[5] A gradual implementation should cause little or no disruption to the retirement plans of current workers while providing significant long-term savings.

3. Focus Benefits on Those Who Most Need Them

Changing benefit levels for higher earners is not a radical idea. One of Social Security’s original purposes was to protect seniors from poverty and economic hardship. Changing benefit structure would be a step toward returning to that goal.

Today, Social Security’s benefit formula pays a higher monthly retirement benefit to lower-income workers compared to their average lifetime income than it does to those who had higher incomes. But the simple fact is that the money is not there to pay full benefits even as they are income adjusted today. To do so would require ever increasing taxes on younger generations.

Social Security could further focus benefits on lower-income workers by paying still lower benefits to those with high levels of non-Social Security retirement income. An even further step would be to completely eliminate benefits for those with the highest amounts of non-Social Security income.

One way to accomplish this goal is found in The Heritage Foundation’s plan Saving the American Dream.[6] The Heritage plan makes Social Security an insurance program that would protect every American against retirement poverty. It focuses exclusively on a retiree’s non-Social Security retirement income and both reduces benefits for those with incomes above a certain level and eliminates them for retirees with still higher incomes. As a true insurance plan, if a retiree’s circumstances changed and his or her retirement income dropped, Social Security would quickly re-start the person’s benefits.

Upper-income workers are more likely to work at companies that offer them either traditional pensions or retirement savings plans. They are also much more likely to have extra income to put away for retirement.

This change would strengthen the Social Security program’s finances markedly while avoiding the large and continuous tax increases on younger generations who need to build their own savings. It would also pave the way for other substantive reforms to Social Security and retirement savings.

Improving Social Security to Meet Tomorrow’s Needs

It is time to focus on the real cause of America’s fiscal problems. These three improvements would help make Social Security more affordable, reduce today’s cash-flow deficits, and start the process of heading off 2033′s automatic 25 percent benefit cuts. However, these reforms are just a start. Actually fixing the program will require still more reforms.

Once the immediate fiscal cliff debate ends, the nation should ask how Social Security can be structured to better meet Americans’ needs in the decades to come. That discussion should lead to more fundamental reforms, among which should be ensuring that every American is protected from retirement poverty. Making the changes proposed above as part of the current budget debate is a good way to start that conversation.

–David C. John is Senior Research Fellow in Retirement Security and Financial Institutions in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

[1]Ryan Grim, “Dick Durbin: Social Security Should Be off the Fiscal Cliff Table [UPDATE],” The Huffington Post, November 27, 2012, http://www.huffingtonpost.com/2012/11/27/dick-durbin-social-security-fiscal-cliff_n_2199224.html (accessed December 18, 2012).

[2]Congress would have to invest $11.3 trillion today in order to have enough money to pay all of Social Security’s promised benefits through 2086. This money would be in addition to what Social Security receives during those years from its payroll taxes.

[3]Various ethnic and racial groups have slight differences in longevity. Counting both genders together, an African American who reaches age 65 has a total life expectancy of 1.2 years less than a non-Hispanic Caucasian. However, a Hispanic worker at age 65 has a life expectancy that is 4.2 years longer than that of an African American and three years longer than that of a non-Hispanic Caucasian. For all groups, women tend to live several years longer than men.

[4]During those six years, longevity at age 65 went up by a full year for both white and African American men, 1.1 years for African American women and 0.7 years for white women.

[5]For a full discussion of changing the retirement age, including a discussion of how those who are physically unable to continue to work would be able to receive disability benefits, see David C. John, “Time to Raise Social Security’s Retirement Age,” Heritage Foundation Backgrounder No. 2492, November 22, 2010, http://www.heritage.org/research/reports/2010/11/time-to-raise-social-securitys-retirement-age.

[6]Stuart M. Butler, Alison Acosta Fraser, and William W. Beach, eds., Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity, The Heritage Foundation, 2011, pp. 5–7, http://savingthedream.org/about-the-plan/plan-details/.