February 22, 2007

February 22, 2007 | Commentary on Federal Budget

Why our domestic entitlements could doom our children

Social Security, Medicare and Medicaid threaten to swamp the federal budget. Left unfixed, these three programs will push federal spending from about 20 percent of GDP today to nearly 50 percent by 2050. Medicare spending alone will triple in less than two generations.

It all begins next year. That's when the first Baby boomers will start drawing Social Security, touching off a ripple that will become a retirement-driven spending tsunami.

The long-term tab for these promised benefits is immense: almost $40 trillion. That, plus the national debt, works out to $400,000 for every full-time worker in America today. But it's our kids and grandkids who will have to shoulder that unconscionable debt. So how do we fix it? There are only three options.

First choice: Do nothing. Under this option, spending on these three programs will double as a share of the economy within a generation. Annual deficits will exceed today's entire federal budget. That's uncharted economic territory. While no one seriously proposes such a "solution," any Washington policymaker who doesn't talk about real solutions is tacitly endorsing such a non-plan.

Second choice: Raise taxes. But first consider that the United States owes much of its economic success to its policy of low taxation and low government spending. To pay for promised entitlements via tax hikes, taxes would have to be jacked up to confiscatory levels-roughly 30 percent of gross domestic product by 2050. That's two-thirds higher than today's tax revenues, and they would need to keep on climbing thereafter.

Tax levels this high would greatly inhibit economic growth, leading to less opportunity, lower wages and higher unemployment for the nation.

Third choice: Rein in spending. We can start by trimming discretionary spending. But let's not fool ourselves. That's not where the real money is. Pulling the plug on pork-barrel spending, for example, would trim only about 2 percent of all spending.

The simple fact is that eliminating all the waste, fraud and abuse from the federal government will not pay for the huge increases in Social Security, Medicare and Medicaid. It would be sort of like trying to bail out the Titanic with a Dixie cup. In fact, even if we slashed spending by eliminating the entire Department of Defense - thus all of our nation's troops we still wouldn't be able to make both ends meet.

The only real choice is to tackle the real problem. That means reining in the huge costs of Social Security, Medicare and Medicaid.

We should begin by rethinking the premise of a guaranteed benefit for everyone, regardless of their need or their ability to pay. To lessen the burden on our kids and grandkids, benefits should be targeted to those who need them the most. Tomorrow's high school graduates should not have to pay for Donald Trump's prescription drugs, nor can they afford to.

Additionally, we should raise the retirement age. Americans are living longer, healthier, more productive lives. Their retirement program should reflect that 21st Century reality.

These are tough choices, and more will be needed. But they are necessary if we are to avoid foisting huge tax increases or debt onto the generations who follow.

Alison Acosta Fraser is Director of the Thomas A. Roe Institute for Economic Policy Studies.

About the Author

Alison Acosta Fraser Senior Fellow and Director of Government Finance Programs
Domestic and Economic Policy

First appeared in the Scripps Treasure Coast papers