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Obama Gearing up to Take on Entitlement Programs

Feb 22, 2009 | Updated May 25, 2011

Barack Obama isn't wasting any time taking on two of the toughest political and fiscal issues in Washington -- Social Security and Medicare. In an interview last week with the Washington Post, Mr. Obama said he plans to tackle entitlement reform head-on, because it's the only way the federal government can get its financial house in order.

There are no easy fixes for Social Security or Medicare. But between the two programs, Social Security presents a more clear-cut series of problems and solutions.

As baby boomers are starting to retire and draw benefits, Social Security's expenses will surpass incoming revenue starting in 2017 if no changes are made. That would force the system to start relying on its trust fund, which would last only until the year 2041. Those projections have been used in the past as a scare tactic by advocates of privatization.

Obama made clear during the campaign that he flat-out opposes the privatization plan that landed with such a loud thud when proposed by George Bush in 2005. That leaves Obama with two options: boost taxes, reduce benefits -- or (most likely) do some combination of the two. Specific ideas floating around include boosting the payroll taxes that fund the program, raising the maximum amount of Social Security benefits subject to tax, or gradually raising the age of full benefit eligibility (also known as Normal Retirement Age -- currently, it's about 66 for most boomers).

For now, Obama isn't saying exactly what he has in mind. Here's how the Post characterized the discussion:

Five days before taking office, Obama was careful not to outline specific fixes for Social Security and Medicare, refusing to endorse either a new blue-ribbon commission or the concept of submitting an overhaul plan to Congress that would be subject only to an up-or-down vote, similar to the one used to reach agreement on the closure of military bases.

But the president-elect exuded confidence that his economic team will succeed where others have not.

"Social Security, we can solve," he said, waving his left hand. "The big problem is Medicare, which is unsustainable. . . . We can't solve Medicare in isolation from the broader problems of the health-care system."

No doubt about it -- Medicare make Social Security look like a walk in the park. It's not simply a demographic problem tied to an aging population; overall health care utilization is rising quickly, along with costs. Medicare expenditures are expected to hit $486 billion in 2009, accounting for roughly 14 percent of the federal budget. Expenses are rising much faster than overall inflation and are on track to hit $887 billion by 2018.

Obama campaigned on a promise to cure Medicare by letting the federal government negotiate for lower drug prices, and providing greater transparency in the Part D prescription drug program. He also has cited the Medicare Advantage program as a wasteful privatization plan. He's promised to scale it back or even eliminate big portions of the Advantage program. Those ideas are credible, but few experts I've talked with think they add up to anything like a comprehensive solution.

Medicare solutions most likely need to be linked with Obama's broader health insurance reform. Along with expanded coverage, that initiative will have to address utilization and cost issues if it has any chance of success.

To learn more about entitement issues, visit RetirementRevised.com. Background on the Social Security issue is here; Medicare coverage is here.