United States House of Representatives
My name is Alison Acosta Fraser. I am Director of Economic
Policy Studies at The Heritage Foundation. The views I express in
this testimony are my own and should not be construed as
representing any official position of The Heritage Foundation.
Thank you for the opportunity to speak to the committee on this
most important issue.
Entitlement Tsunami Challenge
- Entitlements will cause the budget (without interest) to soar
from 18.8 percent of GDP today, to 35.3 percent by 2082.
- With interest included spending will soar from 20 percent of
GDP to 75 percent by 2082 if current tax policies are kept in
- Maintaining current tax policy will result in revenues rising
above the post World War II average of 18.3%.
- The gap between future benefits and funding committed for
Medicare is $36 trillion, Social Security nearly $7 trillion
- When other liabilities like the national debt are added in this
is the equivalent of a $175,000 mortgage for every man, woman and
child in American - only without the house to go with it.
- The SAFE Commission ACT is a bold way to build public support
for change and forge bipartisan agreement for action.
Entitlement spending on Medicare, Medicaid, and Social Security
is a tsunami heading toward our budgetary and economic shores.
Experts across the ideological spectrum agree that entitlements
threaten the nation's priorities.
Entitlements are not budgeted in the same manner as most other
federal programs. Though there are strong reasons for this
approach, this means that entitlement spending grows virtually
unchecked from year to year. This approach to budgeting makes it
exceedingly difficult to tackle entitlement spending, but it does
not diminish the need to do so.
The Congressional Budget Office's latest analysis projects that
spending on these three entitlements will cause the budget (without
interest spending) to soar from 18.8 percent of gross domestic
product to 24 percent by 2030, 28.3 percent by 2050, and 35.3
percent by 2082. Maintaining current tax policy and with tax levels
rising just above the historical average of 18.3 percent of GDP,
total spending including interest skyrockets from 20 percent
of GDP in 2007 to 75.4 percent in 2082.
Clearly, this is an unsustainable budget path, and it is one
that is driven by entitlement spending. Social Security and
Medicare have promised $42.9 trillion more in benefits to senior
and disabled workers than the programs will be able to pay,
according to a new report. Social Security's long-term unfunded
obligations are $6.6 trillion; Medicare's are $36.3 trillion. When
other liabilities and obligations are factored in, this is the
equivalent of $175,000 for every man, woman, and child in
America--nearly the equivalent of a mortgage, but one without a
home to go with it.
According to the CBO "Ryan letter," if entitlements are left
unchecked, spending will cause huge deficits that will begin to
extract a tremendous toll on the economy, causing GNP not only to
stop growing, but also to contract. In out years, "project deficits
would become so large and unsustainable" that CBO's models simply
cannot calculate the impact on the economy. Moreover, the estimates
"greatly understate the potential loss to economic growth."
The spending problem is so massive that federal tax rates would
have rise to stagnating--even confiscatory--levels to close the
gap. CBO estimates that today's income tax rates would have to more
to Pay for
This is calculated without any economic feedback. Such tax rates
would come at a tremendous cost to the economy and create other
problems as well. According to the CBO, revenues would likely fall
materially short of their projections and thus are not feasible. The
U.S. Corporate tax rate is already one of the highest among the
industrialized nations. In order to remain competitive in the
global economy, our tax rates should be going down, not up.
Why a Commission
Representatives Jim Cooper (D-TN) and Frank Wolf's (R-VA) Safe
Commission Act (H.R. 3654) would create a vehicle for action that
could break the entitlement legislative logjam. This legislation
would achieve both public acceptance for solutions to the
entitlement tsunami and bipartisan action to put these solutions
into law. Since many experts feel that entitlement spending is the
greatest economic challenge facing the nation, the need to tackle
it is vital.
Legislation moving through Congress frequently takes steps
backward, not forward to rein in the soaring costs of entitlements.
It is politically difficult for most Members to talk about
meaningful reform. The legislative and budget processes only
aggravate that dynamic.
The entitlement tsunami is driven by huge increases in future
federal spending on retirement programs for middle-class retirees:
Medicare, Medicaid, and Social Security. It is not driven by
falling tax levels.
The reality of today's politically deadlocked environment means
that many lawmakers may insist that revenues must be considered if
reductions in popular entitlements are to occur. Conservatives
resist the idea of raising taxes for several reasons: Taxes are not
the problem, future spending growth is; and raising taxes would
threaten the economy, compounding the harm from higher levels of
government spending. Moreover, increasing taxes would likely reduce
the pressure on Congress to curb spending, or could even increase
spending in other areas
The Cooper-Wolf bill provides a rational solution to this
political quagmire. It creates a bipartisan commission with a
mandate to address the "unsustainable imbalance" between federal
commitments and revenues while increasing national savings and
making the budget process give greater emphasis to long-term fiscal
issues. While the commission could consider a range of approaches,
the bill places emphasis on two:
- Reforms that would limit the growth of entitlements while
strengthening the safety net, and
- Tax reforms that would make the tax system more economically
efficient and improve economic growth.
Focusing on slowing the growth in entitlement spending, along
with changes to strengthen assistance for the needy, the
commission's proposal should appeal to those who worry that surging
middle-class entitlement retiree spending will crowd out spending
on other priorities. On the other hand, focusing on pro-growth tax
reforms that improve economic growth (and also lead to an increase
in revenues, just as the 2003 tax changes produced increases in
revenues) is a critical issue for those who worry about escalating
tax levels. Combining both of these areas of concern into a reform
package is necessary in this polarized political environment to
achieve changes that can be acceptable across the political and
Public engagement is another vital feature of this commission.
This commission would not create a backroom deal and drop the
results on the nation. Rather, it would hold public hearings to
discuss the long-term entitlement challenge. This essential first
step would consist of public "town hall"-style meetings across the
nation to speak frankly about the long-term fiscal challenge and
the tough options for fixing it.
Taking this first step would help to build public acceptance of
the need to fix entitlements and support for ultimate plans to
modernize the programs. These discussions would require balancing
the worries of the young and the elderly. This up-front guidance
and buy-in from Americans of all walks of life would help to guide
the commission in creating detailed recommendations that would
receive much broader support and understanding than proposals
crafted solely inside the Beltway.
In today's political environment, it is extremely difficult and
uncomfortable for many, if not most, Members of Congress to
explicitly discuss the colossal fiscal challenge that entitlements
present. The highly partisan environment often seeks to push
discussions further and further from real action on these tough
problems. The end result is that succeeding Congresses merely kick
the can down the road. The Cooper-Wolf SAFE Act would change these
underlying dynamics so that entitlements can be tackled and a huge
economic disaster prevented.
Fiscal Wake-Up Tour
I have been a partner in the Fiscal Wake-Up Tour, sponsored by
the Concord Coalition with The Heritage Foundation and the
Brookings Institution and featuring former Comptroller General
David Walker. The Fiscal Wake-Up Tour has traveled the nation for
over two years, educating Americans on the problem and possible
Americans trust the data that are presented in the Fiscal
Wake-Up Tour, and they are prepared to discuss, accept, and
sometimes even demand solutions to entitlement spending that most
politicians assume would be unacceptable to the public. Moreover,
they view the budget crisis primarily as a moral issue, centered on
the huge debt--that $175,000--facing the younger generations, often
their children and grandchildren, not as just an economic
Americans are ready to have this conversation and often wonder
why there is not more being done in Washington to solve the
The entitlement problem has been well known for years. Experts
from the right and the left agree that entitlements are fiscally
unsustainable and a threat to the economy, as indicated earlier.
Many budget and fiscal policy experts have written extensively to
warn of the entitlement problem. Audiences appreciate the
respectful and frank bipartisan nature of these conversations.
Representative Paul Ryan (R-WI) has proposed a bold legislative
road map to rein in entitlements--and without raising taxes. This
plan is a collection of bold, comprehensive, and sweeping reforms
covering a broad spectrum of issues. He has laid out his vision for
reforming entitlements and challenges others with different views
to present them.
Sadly, legislative action in Congress to achieve tough first
steps toward solving this problem, Ryan's road map and the SAFE
Commission Act notwithstanding, has not been forthcoming. Worse,
efforts to rein in costs are frequently stymied even by those who
view entitlements as a legitimate threat.
When tough legislation is proposed, every conceivable
special-interest group--and their lobbyists--will work diligently
to ensure that their particular interests are protected or receive
even more favorable treatment. With programs like Medicare and
Medicaid, there is an astonishing array of stakeholders: doctors,
hospitals, drug companies, durable medical equipment providers, to
name just a few who will want to be held harmless. The legislative
result is predictable. Legislation to curb entitlements this year
seems likely to meet a dismal fate.
- The Medicare trigger law in the Medicare Modernization Act of
2003 (MMA) requires the President to submit legislation to the
Congress for consideration when Medicare's general revenue funding
becomes excessive. That trigger was pulled this spring and is an
important step for Congress in addressing Medicare's perilous
spending. The deadline for the House to act is June
30, yet no positive action to bring Medicare spending under the
trigger level is being planned as of this writing.
- A moratorium to prohibit the Administration from increasing the
integrity of Medicaid's federal matching rules is included in the
current war supplemental funding legislation. The need to overhaul
federal matching fund rules has been noted for decades, including a
strong critique from the Government Accountability Office. These
administrative changes would make it more difficult for states to
use inappropriate or questionable techniques to maximize their
federal matching rate, but this moratorium would eliminate a good
first step toward reining in Medicaid's soaring costs.
- The MMA also authorized Health and Human Services, which runs
Medicare, to require direct competition for durable medical goods
by the companies that provide them. If the program is allowed to
grow, savings could be as high as $1 billion a year. This would
also directly translate to savings for Medicare retirees since they
typically make a 20 percent co-payment on this equipment. But these
steps sadly are being sidelined by legislation pending in
Despite a series of warnings about the economic and
intergenerational harm from the entitlement tsunami, action from
Congress seems increasingly difficult and unlikely without bold
changes in the legislative dynamics, as these three examples show.
The SAFE Commission Act would transcend this type of legislative
Medicare Reforms vs. Health Care Reforms
Part of Medicare's problems stem from the fact that medical
spending has outpaced the economy for decades. This doesn't mean,
however, that there are not real steps that should be taken to rein
in Medicare costs. A major portion of Medicare's spiraling costs in
the next two decades is a result of the number of beneficiaries
nearly doubling. Growth in each retiree's health care costs is
certainly a large part of Medicare's spending problem, even the
largest, but the increasing number of retirees in the system sorely
exacerbates the trajectory of spending increases, with serious
Since Medicare accounts for roughly 20 percent of the nation's
health care bill and other federal programs account for an
additional 13 percent, Congress can and should revisit Medicare's
structure to determine a way to make the program more affordable
for future generations while ensuring that the basic needs of older
Americans continue to be met.
Americans understand the entitlement problem and the
consequences of inaction. They are ready for a national debate and
anxious for Washington to work together to find solutions.
Representatives Cooper and Wolf recognize that the nation's
budgeting system is ill equipped to tackle the entitlement problem
and that the political environment will not lead to a sustainable,
responsible long-term federal budget. This is a sound proposal that
could fundamentally change those tensions to achieve actioin and
lead to a better future for younger and older generations
features: maintaining the 2001 and 2003 tax cuts and indexing the
alternative minimum tax (AMT).
Peter R. Orszag, letter to Honorable Paul Ryan, Ranking Member,
Committee on the Budget, U.S. House of Representatives, on "The
Long-Term Economic Effects of Some Alternative Budget Policies,"
May 19, 2008, at http://www.cbo.gov/doc.cfm?index=9216.