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December 5, 2005

Entitlement Fix Not an Option for Uncle Sam

By

Sixth in a Series

 

When the federal government first sent men into space, it vowed to bring them all home safely. "Failure is not an option," flight director Gene Kranz famously told mission control when Apollo 13 was in danger.

NASA kept its promise and brought those three men home safely. But it's an open question whether Uncle Sam can keep another important promise: To provide for retirees through Social Security and Medicare. Once again, failure is "not an option," but it remains a possibility.

Let's begin with the more troubled Medicare. The 2005 Medicare trustees' report estimated that providing all promised benefits in just the next decade could require some $2.7 trillion in new tax revenues. After that, the problem worsens. The long-term numbers are mind-boggling:

Providing promised Medicare benefits over the next 75 years would require $29.9 trillion in new tax revenues. And those numbers will rise as medical science creates better and more expensive treatments.

A recent Heritage Foundation report projected that "Raising taxes to meet Medicare's 75-year shortfall would cost an average of 2.3 million jobs and well over $190 billion in real GDP annually through 2015."

This is a surefire way to end the sort of economic growth that has always allowed the ordinary American to climb the ladder. We could be talking about the end of the American dream. And that's the beginning. The real financial hit comes later, with ever-more retirees on Medicare and ever-fewer workers shelling out ever-larger amounts in payroll taxes.

Faced with this scenario, one might expect Congress to take action. And in 2003 lawmakers did -- by adding Part D, an open-ended prescription-drug benefit. In one stroke, a Republican congress and a Republican president saddled taxpayers with an additional $8.7 trillion dollars of unfunded liabilities. Comptroller General David Walker recently noted, "if that's not imprudent, I don't know what is."

So what would be prudent? First, suspend Part D by at least a year in order to determine if it should be revised or how to pay for it without raising taxes.

Financial conservatives in the Senate have proposed exactly that. Their "Fiscal Watch Team Offset Package" would delay Part D and save at least $115 billion over the next two years.

It also would extend and make even more generous the current drug-card program that's helping low-income seniors. This would be a reasonable start on the road to fiscal sanity. Once we do that, we can start truly reforming Medicare by giving recipients more health-care plans to choose from.

Lawmakers also need to fix Social Security. To cover all promised benefits, Congress would have to pony up $5.7 trillion today. That's a big hole to dig out of, but we do have a brief window of opportunity in which to act.

Social Security is currently taking in more than it spends and will keep doing so until 2017. Congress should let Americans invest a portion of their payroll taxes in personal retirement accounts (PRAs) that they, the taxpayers, would control. That way, these surpluses would pile up in individual accounts. Workers would be able to invest this money in much the same way they invest their 401(k)s.

PRAs would allow even low-income earners to build up substantial nest eggs. And workers would actually own them. They could spend their money as they wish, using it all to finance their golden years or conserving some to pass on to their heirs. And because taxpayers could draw on their own personal accounts, we'd ease the long-term demands on traditional Social Security.

There's a reason Medicare and Social Security are called "entitlements." Taxpayers have made payments throughout their working lives and believe they are entitled to collect benefits as long as they live.

In much the same way, employees at General Motors thought they were entitled to benefits, including free prescription drugs for life. But the company, facing potential bankruptcy, is now attempting to change its benefit package.

The same thing could happen with Medicare and Social Security. Unless lawmakers fix these programs, future retirees might have to watch Washington renege on, or at least reduce, its promises.

Next week, we'll look at how to relieve some of the pressure on lawmakers -- by reforming "K Street Conservatism."

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

First Appeared in Investor's Business Daily

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