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PERSPECTIVE ON ENTITLEMENTS : We Hurt Those Who Need It Most : For instance, 47% of those affected by a freeze on Social Security adjustment have incomes under $20,000.

February 07, 1993|RON POLLACK | Ron Pollack is the executive director of Families USA in Washington, a national consumer organization that focuses on health and long-term care.

Budget managers in the Clinton Administration are taking a hard look at cutting so-called entitlement spending--Social Security, Medicare and Medicaid--to help reduce the federal deficit.

The politics of entitlement cuts usually produce much more heat than light. Often left in the dark is careful analysis about who gets hurt by different cuts.

Not all proposals to cut entitlements are alike, either in the savings they produce or in their social consequences. Clearly, there are positive as well as negative ways to change entitlement spending.

The Social Security program best exemplifies the good and bad ways to deal with entitlement costs. Currently, two Social Security proposals are prominently on the deficit-cutting table. One proposal would suspend the annual cost-of-living adjustment (COLA) for one year for all beneficiaries. The other would increase the taxes paid by higher-income persons on their Social Security benefits.

The proposed COLA cut would reduce the deficit more significantly in the short term, while the Social Security tax would raise more money in the long term. But the contrast between these two proposals does not stop there. Who bears the brunt of these different measures is the most salient distinction.

A COLA freeze would disproportionately harm lower-income beneficiaries. Of the money raised through a freeze, a whopping 47% would come from beneficiaries with incomes below $20,000 a year. Another 33% would come from people with incomes between $20,000 and $40,000. All in all, more than four out of every five dollars in budget savings would be taken out of the incomes of those with incomes below $40,000.

A one-year freeze of the Social Security COLA would also push 289,000 people nationwide below the poverty line--now set at $6,990 a year for an individual and $8,815 for a couple.

Another 342,000 Americans would see their incomes drop between the poverty line and 50% above the poverty line. Supplemental Security Income, the key income safety-net program, wouldn't cushion the fall since federal SSI eligibility standards are well below the poverty line.

Cuts in Social Security benefits are especially harmful for those living on the margin. Four out of every five dollars received by seniors with incomes at or just above the line of poverty are derived from Social Security. But for seniors with incomes above $50,000, less than one-fifth comes from Social Security. As a result, a COLA freeze would be very regressive.

A very different distributional impact occurs when Social Security benefits are fully taxed for those who currently pay only partial taxes on such benefits. More than six out of every seven dollars in increased revenues would come from people with incomes above $40,000 a year. The average income of a person affected by such a tax is more than $61,000. And no one would be thrown into poverty under the proposal.

Clearly, the proposal to increase Social Security taxes for higher-income beneficiaries is far more equitable than a COLA freeze. It would also make the taxation of Social Security benefits more consistent with tax policy on other income received by seniors.

Efforts to cut the health-care entitlement programs, Medicare and Medicaid, also pose good and bad choices. One choice, with very harmful consequences, would place limitations on Medicare and Medicaid costs without parallel constraints on health-care spending. A more effective approach would establish limits on total health spending, which would squeeze out waste and overcharges, with Medicare and Medicaid savings achieved in the process.

Isolated cuts in Medicare and Medicaid would exacerbate three existing problems. First, they could result in higher out-of-pocket health costs--through added premiums, deductibles and co-payments--for poor people and seniors. For too many program beneficiaries, these costs are already unaffordable.

Second, by reducing Medicare and Medicaid payment levels for health-care providers, fewer physicians and hospitals would keep their doors open for the elderly and the poor. Already there is a large discrepancy between what doctors and hospitals receive from privately insured patients versus payments from Medicare and Medicaid. If that discrepancy grows, fewer seniors and poor people would have access to care.

Third, doctors who continue to treat seniors and the poor would make up for lost Medicare and Medicaid income by shifting more health-care costs onto everyone else. Thus the health-billing shell game would continue to get worse. Costs would be shifted to middle-class families and to businesses but not contained.

The only effective way to rein in health-care spending--including Medicare and Medicaid--is by placing effective limits on what Americans are charged for our health care. It is exactly such an approach that President Clinton promised during the campaign, and such an approach deserves the support of the American public.

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