This has never seemed like a good fiscal solution to me. In part it simply shifts expenditures from the public books to private hands. That may have useful “shadow value properties” (if the government budget constraint is more immediately binding), but it’s not a net real resource savings for the economy as a whole.
And in part I am suspicious of such a discrete “notch” in how we treat individuals. Right before your birthday you’re in one program and the day after your birthday you’re in a totally different program? Something has to be screwy, though you can debate whether that screwiness is ex ante or ex post. I usually think more in terms of smoothly sliding schedules and, when needed, changes in their slopes, with only gentle bumps in the relevant notches.
If the choice is “cut all payments by ?? percent” or “raise the retirement age by two years” I would opt for the former. If (and oh what a huge if) you had a Cowenian dictatorial technocrat in charge, you could even think about lowering the eligibility age. That said, everyone would be “buying in” to the program at much less favorable rates than is the case today. I do fully understand the public choice reasons why that wouldn’t stick, why it would survive only in a Cowenian dictatorial technocratic equilibrium, and why in real democracy it would quickly become a “goodie” to be handed out to poorly informed, short time horizon voters in a disastrous, budget-busting manner.
Put all that behind us but store it in memory. When I see President Obama considering an increase in the Medicare retirement age, here is what I do not infer:
1. I do not infer he is a coward (didn’t he stake his whole political future on ACA?).
2. I do not infer that he is a worse bargainer than are the Republicans.
3. I do not infer that he is a very stupid man.
4. I do not infer White House cabal theories which have his mind in the hands of evil villains, hellbent on reelection and ready to throw all progressive principles to the winds.
Here is what I do infer:
1. I infer he understands that the Medicare Payment Advisory Board isn’t going to live up to the high hopes for it. It may not even survive.
2. I infer he understands that most other plans for Medicare cuts won’t get through Congress, and that it will only get tougher to pass such plans each year.
3. I infer he understands that somewhat fewer Medicare recipients at any point in time will, possibly, make it easier to reform and indeed improve other aspects of the program.
4. I infer he understands that Medicare truly is the budget-buster of our time and that its future will not ever be ruled by technocratic principles.
Most of all, I infer that our President has had a very deep, very true, and indeed very depressing education in public choice economics. And I infer that any path to a workable fiscal conservatism will be tougher and more painful and more distortionary than we had thought.
Personally, I still would opt for an alternative route, even if it were doomed to fail politically. But that’s a luxury I have precisely because I am not…President of the United States.
Addendum: Ezra Klein comments.