February 7, 2005

February 7, 2005 | Commentary on Social Security

State of the Union: Bush's vision, budget realities

It was a Wednesday night in Washington that few in the nation's power elite will soon forget. Only a few minutes into his fifth State of the Union speech, President Bush announced a virtual no-growth budget for the next fiscal year and called on Congress to reduce or eliminate funding for federal programs that don't work: "The principle here is clear: a taxpayer dollar must be spent wisely, or not at all."

That's bad enough for defenders of the status quo, but he piled on by calling for fundamental reform of politics' "third rail," Social Security. The nation's premier income insurance system is headed for insolvency and must be saved and strengthened the old-fashioned way: through savings and harnessing the power of compound interest.

Tomorrow, the Bush administration will send Congress its budget proposals for fiscal year 2006. That document will renew the president's call to members of Congress to join him in a historic effort to put the nation's financial house in order. His success likely will turn on how well he convinces Americans that Congress cannot avoid the fiscal challenges facing the federal government, that major policy moves by the president and Congress are required to bring more discipline to Washington, and that he has an electoral mandate to do all of this.

As for fiscal challenges, President Bush had it just about right last Wednesday. It's remarkable that the economy is in as good shape as it is, given the spending excesses of the past several years. The nonpartisan Congressional Budget Office recently estimated that total federal spending might increase from $2.3 trillion in fiscal year 2004 to $3.7 trillion in fiscal year 2015. That would be a 61 percent increase in spending over 10 years - and we can count on the amount actually spent to be much higher. As CBO notes, current budget rules don't allow it to count spending on military activities in Iraq, Afghanistan and the war on terror. Likewise, their spending forecasts don't include special, one-time outlays, like last year's hurricane relief.

If the past is any guide, superhuman presidential leadership will be required to hold down spending growth. Since 2001, federal spending has grown by 25 percent, and now exceeds $20,000 for every household in the country, according to my Heritage Foundation colleague, Brian Riedl. And, that's not the worst of it: Even after taking out homeland security and our foreign war on terror, spending has increased more in the last three years than in the last six years of the Clinton administration.

Rapidly growing spending has outstripped rapidly growing revenues, creating record-level deficits. CBO estimates that the 2005 fiscal year deficit will likely be $368 billion and will be followed by a deficit in 2006 of $295 billion. That's a total, two-year deficit of nearly $700 billion. While growing deficits probably have little to do with rising interest rates (indeed, experts say that long-term interest rates rise only .03 percent for each $100 billion in new debt), they do indicate how difficult it is for Congress to live within its means and choose among competing priorities.

President Bush now is asking Congress to make those tough calls. So, what are they?

Let's start with the low-hanging fruit. Hundreds of federal programs either work poorly or do not accomplish their mission at all. Many more duplicate others unnecessarily. Bush has asked Congress to react like the private sector would when faced by poor performance and rid the budget of these activities.

Evaluating the effectiveness of government programs may be the next big thing in public-sector management, and it already has brought several big successes. For example, Congress passed legislation in 1994 to fund President Clinton's COPS program, which promised to put 100,000 new police officers on the street and reduce crime. Research conducted in part by The Heritage Foundation in the late 1990s showed that COPS hasn't come close to reaching its new officer goals after years of trying and $11.6 billion in outlays. Furthermore, crime rates in major COPS cities were virtually unaffected by the program. Now, the Bush administration is proposing that Congress formally close down this waste of taxpayer dollars.

Programs that don't work, like COPS (or the Goth Studies Center, where researchers ponder why teenagers paint their nails black) are relatively easy to address compared to the effort required to fix really big problems, such as Social Security's future financial shortfalls. Indeed, Bush's talents as an agent of policy change will be tested most when he tries to convince some Republicans and nearly all Democrats that they should change the federal government's most popular program at a time when it is running record surpluses.

So, why should they? The simple answer is that demographics are relentlessly moving against the financial integrity of Social Security's retirement program - and soon will be undermining Medicare, as well. The architects of these programs structured them so that the taxes from current workers would pay the benefits of current retirees. For the average retiree to live well, we need to have about five average income workers paying their taxes each month. However, too few workers or too many retirees upsets this balance and, thus, the structure of the program. Today, there are about three workers per retiree, and that's on the eve of the largest wave of new retirees in the nation's history. By 2020, Social Security's actuaries predict that about two workers will be supporting each retiree. That's a big problem.

How big? As the president said Wednesday, in 13 years the outlays from Social Security will begin exceeding the program's revenues. Each year thereafter, Congress will have to increase taxes, cut spending, or borrow money just to meet the increasing shortfalls in payroll taxes. Social Security's actuaries currently forecast that these shortfalls will equal $27 trillion (in today's dollars) over the next 75 years. Nobody has the slightest idea how much $27 trillion is, but any parent knows that 13 years is a veritable demographic blink of an eye.

Bush wants to combine personal retirement accounts with traditional Social Security benefits as the means for bridging this funding gap. That's a sensible solution, one that has been successfully implemented by other highly developed countries. However, sensible is one thing; politics is another. Making a change this large in a program this popular requires enormous political capital.

So, does the president have a mandate to do big things? Unfortunately, mandates are made by historians, not voters. No one knows until after the legislative victories are all recorded whether or not an electoral mandate really existed, and a weakly executed legislative strategy combined with raw bad luck can undermine even the most impressive November victories.

What came through on Wednesday night, however, was a determination to act and to rally other doers to the cause of reform. The country has no shortage of important policy problems waiting to be solved. The open question now is: Can the president lead Congress in the great effort needed to frame the many solutions these pressing problems require?

William W. Beach is director of the Center for Data Analysis and the John M. Olin Senior Fellow in Economics at The Heritage Foundation.

About the Author

William W. Beach Director, Center for Data Analysis and Lazof Family Fellow
Center for Data Analysis

First appeared on SanDiego.com