November 15, 2005

November 15, 2005 | Commentary on Health Care

Drug Benefit Needs a Year On Sidelines

Third in a Series

"Promises are like babies," the saying goes. "Easy to make, hard to deliver." And when it comes to government entitlements, our elected leaders in Washington may soon find out just how hard. Because there's no way they can deliver everything we've been promised.

Begin with Social Security.

In 2017, it will begin spending more in benefits than it collects in taxes. Some will say this shouldn't be a problem: Social Security has been rolling up hefty surpluses lately and will continue doing so for another 12 years. Surely it can tap this fund to keep providing benefits, the way a retiree can tap his 401(k) when he stops working.

Unfortunately, while we're talking about hundreds of billions of "surplus" dollars, there's no real money there. To cover all promised benefits, Congress would have to pony up $5.7 trillion today. That's what the government would have to have on hand to save and invest in order to pay Social Security's promised benefits between 2017 and 2080 and pay back the trust fund.

Social Security isn't even the biggest entitlement on the horizon. Medicare will become a far bigger problem even sooner. A recent study from The Heritage Foundation found that "providing promised Medicare benefits is projected to require more than $2.7 trillion (in nominal dollars) in new tax revenues over just the next 10 years and a mind-boggling $29.9 trillion (in 2005 dollars) over the next 75 years."

To cover Washington's promised entitlements, we would have to double today's tax rates. The rest of the government would need to make do with what's left over.

Meanwhile, with the baby-boom generation retiring, there will be ever-fewer employees supporting ever-more retirees. We're on the cusp of a massive, government-enforced transfer of income from working Americans to retirees, most of whom are relatively well off.

Remember that when Social Security was created in 1935, the retirement age was set above the average male life expectancy. Social Security benefits were intended only to help those who "outlived" their savings. Luckily, that's changed. People live longer, and future generations can expect to do even better. But that means ever more retirees depending on ever fewer workers. There were 42 workers for each retiree in 1945. Today there are only 3.3. And by 2025, the ratio will drop to about two workers per retiree.

In the 1930s, the payroll tax was just 2 percent of income. Now it's 12.4 percent. Today, the average male worker nearing retirement will get just a 1.27 percent return on his lifetime of taxes.

Congress must do something to fix this. But when lawmakers have acted on entitlements, they've made the long-term problems worse.

In 2003, they saddled Medicare with an ill-advised prescription-drug benefit. It's expected to cost some $724 billion in its first decade, and it was completely unnecessary: Three quarters of retirees already have some form of drug coverage.

It would have made more sense to target the benefit to those who really needed it, by extending the prescription-drug card program launched in 2004.

Instead, lawmakers drafted a one-size-fits-all, universal entitlement, saddling an already struggling Medicare program with hundreds of billions of dollars in new liabilities. Unless this benefit is suspended, many retirees will start losing their private drug coverage next year.

Fixing the entitlement problem will require us to think hard about transforming Medicare, Medicaid and Social Security.

Lawmakers should consider requiring Americans to save or buy insurance for their retirement needs so we can focus federal help only on those who really need it. At the same time, we should find ways to keep benefits from getting out of control.

It would make sense, as President Bush has proposed, to promise fewer benefits to middle- and upper-income Americans, who depend much less on Social Security for their retirement. Yes, that will mean Warren Buffet loses his Social Security, and Bill Gates never gets his promised prescription-drug benefit. But we must bring the government's entitlement promises closer to the reality of its revenues if we're going to protect and even improve the benefits of lower-income Americans.

On a more practical and immediate level, it's critical to suspend the new drug benefit for a year, while we figure out what structural changes to make. We've got huge financial commitments under today's programs. Next week, I'll look at the possible consequences of not instituting major reforms.


Ed Feulner is president of The Heritage Foundation (heritage.org), a Washington-based public policy research institute.

About the Author

Edwin J. Feulner, Ph.D. Founder, Chairman of the Asian Studies Center, and Chung Ju-yung Fellow
Founder's Office

First Appeared in Investor's Business Daily