September 24, 2007

September 24, 2007 | Commentary on Social Security

Reining in the red ink

Like Noah warning of the pending flood, the latest Medicare and Social Security Trustees' reports were dire, warning the day of reckoning draws nigh. As usual, though, Congress is ignoring the gathering clouds while finding new ways to spend billions more on entitlements.

Lawmakers are demanding real progress on benchmarks for the Iraqi government. Perhaps the American people need to set benchmarks for their own government on entitlements.

Bottom line: Social Security faces a financial abyss that deepened by $200 billion over the last year, while Medicare's abyss grew by $3.8 trillion. To give these figures some perspective, the combined increase in the Medicare and Social Security shortfall is roughly 25 times larger than the latest forecast for the 2007 federal budget deficit.

Congressional Budget Office directors also have sounded the warning for years. The comptroller general and the director of the Government Accountability Office recently upped the rhetoric with an apocalyptic comparison to the fall of the Roman Empire. And members of the think-tank community, from left to right, have banded together in a national Fiscal Wake-Up Tour to explain the issues. In short, the problem is not in dispute.

Unfortunately, the Bush administration's record on entitlements is decidedly mixed. Whatever the policy merits of enacting the Medicare prescription drug benefit in 2003, expanding Medicare and deepening its massive financial hole was strikingly irresponsible.

However, the president has since been fairly bold and somewhat successful. Working with the Republican leadership in Congress he pushed through the Deficit Reduction Act in 2005, for example, shaving almost $51 billion over 10 years off the growth in Medicare and Medicaid spending.

Following the 2004 elections the president pressed for personal accounts, but he also argued to restore Social Security to solvency through a handful of minor, phased-in changes. Democrats and many Republicans made inaction on Social Security their top priority, and they succeeded.

This year the president offered substantive proposals to slow Medicare spending growth, including a proposal to reduce the subsidy for higher-income beneficiaries of the new Medicare drug program. These proposals would reduce the growth in Medicare by $252 billion over the next 10 years, according to the trustees. Over the next 75 years, a common point of reference for these programs, the president's proposals would fill the Medicare abyss by a quarter.

And Congress? Earlier this year the House and Senate developed their budget marching orders for the coming year, providing the new Democratic majorities' first real opportunity to show progress - their first entitlement policy benchmark. They chose to do exactly nothing. Congressional benchmark result: Unsatisfactory.

This Congress still has ample opportunity to recover, however. A good benchmark Americans can use this fall to judge congressional progress would be whether key committees, especially Senate Finance and House Ways and Means, hold substantive hearings on possible solutions for both Social Security and Medicare. This is the second entitlement benchmark.

A third benchmark arises with next year's budget resolution. Congress ignored the entitlement problems in this year's resolution, but they can redeem themselves by requiring strong action to reduce entitlement spending next year. The timing would be good: Baby Boomers will start to retire and draw Social Security benefits in 2008, marking the official beginning of the red-ink threat.

Next spring the president is required by law to propose improvements to Medicare's finances. Medicare is financed by a combination of payroll tax receipts, premiums and general revenues. The general revenue contribution to Medicare is now projected to exceed 45 percent of total spending. The president must propose changes to bring general-revenue support back below 45 percent. Reforms that just meet this test would not, by themselves, solve Medicare's financing problem, but they would represent progress. So the fourth entitlement benchmark for Congress is to pass legislation bringing general-revenue support back below 45 percent.

The fifth benchmark for this Congress will be passing legislation the president can sign into law to make significant progress toward Social Security solvency. Surely if Congress can hold the Iraqi government to progress benchmarks in the Iraqis' attempts to craft a working government out of chaos, Americans can hold Congress to these five entitlement progress benchmarks to work toward solvency for these programs vital to America's seniors.

JD Foster is the Norman B. Ture senior fellow in the economics of fiscal policy at the Heritage Foundation.

About the Author

J.D. Foster, Ph.D. Norman B. Ture Senior Fellow in the Economics of Fiscal Policy
Thomas A. Roe Institute for Economic Policy Studies

First appeared in the Washington Times