capture different elements of the overall picture, simplifying where possible to keep the most important elements of particular policy changes in focus.

To see how these different channels of transmission from policy to the economy may operate, it is helpful to focus on the three broad categories of policy adjustments that have been considered to address the fiscal imbalances.

Steps to Rein in Excess Health Care Cost Growth

One of the key differences between the most optimistic and most pessimistic scenarios in Figure 9-4 is the assumption about the trajectory of federal spending on health programs after 2020. Under the optimistic scenario, per-beneficiary health spending grows roughly in line with GDP, whereas under the pessimistic scenario, rapid health spending is responsible for a large and growing portion of the fiscal imbalances over time.

Accordingly, measures like the ACA that attempt to lower the overall health spending of the elderly are likely to be an important component of long-term fiscal policy. Yet the macroeconomic consequences of such measures are among the most difficult to determine. If, as some believe, changes in Medicare policy can induce innovations in health care delivery that lead to reduced spending without a reduction in the quality of care (for example, by eliminating duplication of services, eliminating unnecessary care, or reducing costly errors), then these policy changes would help address the fiscal problem without any required reduction in living standards. On the other hand, lowering the rate of growth of health spending may be accompanied by reduced access to care and a slower rate of growth of innovation, which would lower the living standards of the elderly relative to a baseline in which spending continued to rise faster than GDP. Finally, cuts in Medicare spending could lead to lower income for health service providers, which would be equivalent to a tax on providers. Over time, such a tax could reduce the attractiveness of practicing medicine, which could lead to lower quality and reduced access as well.

Benefit Cuts

There is a wide variety of policies that could lower the growth rate of entitlement spending beyond changing the growth rate of health care costs. Such options include changing the age of eligibility for benefits, changing the generosity of benefits, and limiting benefit growth by increased reliance on means-testing. These different approaches would likely have different distributional consequences; in addition, they might also have differential effects on labor supply.

For example, a policy to index retirement ages (particularly the full retirement age) for Social Security benefits to life expectancy would lower benefits disproportionately for those with a shorter life expectancy. Given

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