President Bush should focus his State of the Union speech on the two policy challenges that will define his legacy and the legacies of those now serving in Congress: winning the War on Terror and meeting the fiscal challenge posed by the looming retirements of the Baby Boom generation.
With respect to the Baby Boomer retirements, the question is how to meet the income and health-care needs of 77 million retired boomers without jeopardizing our prosperity or the security of our nation. To do this, the President must define very clearly just how dangerous it will be if we do nothing to alter the fiscal trajectory of the Big Three entitlement programs (Medicare, Medicaid and Social Security).
More specifically, the President should use the speech to create firewalls around the two options lawmakers may find most tempting: financing the costs of the boomer retirements by enacting massive, unprecedented tax increases and raiding our defense budget. Either scenario puts the future security of our nation at risk and is simply unacceptable.
In less than a year, the oldest members of the Baby Boom generation will celebrate their 62nd birthdays. Some will opt for early retirement and waltz into their neighborhood banks to cash the first Social Security check ever issued to the boomer generation.
Three years later, those same boomers will blow out the candles on their 65th birthday cakes and use their shiny new Medicare cards to pay for the first boomer doctor's appointments ever covered by Medicare.
The problem exists because the boomers will be the largest retirement generation in history. As their ranks grow, the Big Three entitlement programs will explode and become economically unsustainable. Between now and 2050, the share of GDP that these programs consume will jump dramatically, from 8% to 19% (see Page 3). These three programs are on a spending trajectory that will equal about what we spend today on everything the federal government does-not only entitlements, but also highways, education, housing, agriculture, anti-poverty programs and environmental protection, not to mention homeland security and national defense.
If we don't take action now, the job of providing retirement benefits for the boomers will overwhelm the working-age Americans who must shoulder that burden-our children and grandchildren.
The challenge is to pass on to our children a government that's affordable but still delivers the quality services that a retired generation needs. That means we have to align promised benefits with projected tax revenue. Significantly, it does not mean that tax increases are part of the solution. Why is that?
No New Taxes
Today, the American people are paying taxes at about the level that has prevailed, with only minor aberrations, since World War II-approximately 18% of GDP. This may surprise those who have listened to liberal allegations that the Bush tax cuts of 2001 and 2003 benefited only the "rich," deprived the federal government of much-needed revenues, and ballooned the federal deficit. In fact, the pro-growth tax relief-in particular, reducing the top tax rates on income, capital gains and dividends-ushered in 21 consecutive quarters of strong economic growth. That growth has generated what liberals repeatedly refer to as an "unanticipated surge in tax revenues" and a stunning decline in the federal budget deficit.
But this good news is only temporary. If we were to leave the tax code alone, wouldn't our tax burden remain at its current level? No. The tax burden on American workers is scheduled to rise continuously and relentlessly every year from now on.
If Congress takes no action, in less than 10 years our tax burden will climb to where it stood at the end of the Carter Administration. In less than 20 years, we enter uncharted economic territory-the highest tax burden imposed on American workers since World War II. But, unlike in the years following World War II, this burden is not scheduled to revert to the historical norm. Instead, we are looking at the first-ever sustained period in our history where the tax burden grows and grows and grows until it reaches about 24% of GDP by 2050.
To some, increasing the federal tax burden from 18% to 24% of GDP-only six cents on the dollar-over such a long period may sound like an acceptable burden. But consider what 1% of GDP really means. In 2006, American workers and businesses generated $13 trillion in new wealth (what we mean when we talk about GDP). One percent of $13 trillion, of course, equals $130 billion. By 2050, the tax burden will have increased by $780 billion per year, in today's dollars. If that number doesn't register, $780 billion amounts to a crushing tax increase of $6,800 for every American household.
There are three reasons our tax code has set us on this potentially fatal trajectory:
First, the Alternative Minimum Tax (AMT), enacted in 1969 to force a handful of millionaires to pay at least some taxes, was never indexed to inflation. As a result, its reach has expanded dramatically-in 2006 it ensnared 3.5 million taxpayers. In 2007, the number of victims will skyrocket to 24 million taxpayers whose tax bills will increase on average by $3,000. The AMT ranks will continue to explode-to 30 million in 2010, 40 million in 2013, and 50 million by 2016. This expansion of AMT liability accounts for the vast majority of the scheduled tax increase.
Second, beginning in 2009 the Bush tax cuts are scheduled to expire. Taxes on income and investments will rise, the death tax will return, we will once again tax married couples just because they're married, and families raising children will see the child tax credit fall back to $500.
Third, workers who receive raises will move into higher tax brackets as their incomes rise. That, too, bestows a windfall of tax revenue on Uncle Sam.
The irony is that, according to Washington's budget rules, this "triple whammy" doesn't even count as a tax increase. Only the geniuses in Washington can increase your tax burden to historically unprecedented levels and not consider it a tax hike.
As dire as the current situation may be, liberals appear eager to worsen this already unsustainable tax burden. There is talk about putting "everything on the table." Speaker Nancy Pelosi (D.-Calif.) has acknowledged that the new majority in Congress will consider tax increases on the so-called "rich."
Well, tax revenues are already on the table. We already know that our economy can't handle these tax increases. They will break that table.
Further increases in the tax burden would simply diminish our children's quality of life. The American dream-whether they define it as buying a home, sending their kids to college or taking a family vacation-will be beyond their grasp.
President Bush should set forth the domestic equivalent of the Bush Doctrine-that it is in our long-term economic interest to maintain the tax burden at its current, sustainable level. To the average American, this simply means: Whatever level of taxes you pay today, you would pay approximately the same level tomorrow. No tax increase-including the "triple whammy" described above-is acceptable.
Protect Defense Budget
Lawmakers looking for ways to provide for boomer retirement costs might succumb to a second great temptation: raid our defense budget and return us to the days of the "hollow" military.
Our military is already too small and ill-equipped to meet our national security needs, defined as the capability to defend the homeland, sustain four peacekeeping engagements, and fight two large-scale regional conflicts at approximately the same time. Over the next decade, we must bring online the new weapons systems-destroyers, submarines, fighter jets, tankers, combat vehicles and long-range bombers-that will anchor our security for the next generation. At the current level of defense spending, we will fall short of meeting those needs.
With the Congressional Budget Office estimating the defense budget shortfall at a staggering $52 billion per year, it would be the height of folly to offset the costs of the boomer retirements through defense cuts.
Before we resolve the looming crisis of boomer retirements, we must first resolve not to do so in ways that threaten either our economic or national security. What, then, do we do?
The only viable option is to revamp the Big Three entitlement programs. We must begin with the assumption that ordinary Americans are capable of acting prudently to choose the health coverage and retirement investments that best meet their needs and the needs of their families.
Take health care, for example. New data confirm that the competitive private market created in the new Medicare drug benefit has reduced program costs significantly below expectations. When private plans negotiated on behalf of 7 million low-income seniors, for example, something remarkable happened. Drugs not only became more widely available, but the level of taxpayer subsidies fell by more than 20%. The benefits of competition are not just confined to poor seniors. Premiums charged to all seniors have come in dramatically lower than projections, causing the Bush Administration to lower the projected 10-year cost by an astounding $113 billion.
The benefits of competition are also apparent to federal employees. Unlike their counterparts in the private sector who receive the health coverage their employers choose for them, federal employees can choose from among hundreds of competing plans each year. As a result of the fierce competition that results, premiums for federal employees will rise much more slowly in 2007-1.8% compared to a 8.2% increase in employer plans.
If these little slivers of competition can generate such remarkable benefits, then imagine what would happen if we were to inject even more market forces-i.e., freedom-into programs such as Medicare, Medicaid and Social Security.
Michael Franc who has held a number of positions on Capitol Hill, is vice president of Government Relations.
First appeared in Human Events