Deficit Reduction Requires Major Entitlement Reform

COMMENTARY Budget and Spending

Deficit Reduction Requires Major Entitlement Reform

May 18th, 2011 2 min read

Senior Fellow, Manhattan Institute

Most everyone agrees the federal budget is out of control. Annual budget deficits that averaged $300 billion under President George W. Bush have risen to $1.4 trillion under President Obama. This is not merely a short-term effect of the recession. Continuing today’s spending and tax policies would likely produce annual deficits of nearly $2 trillion within a decade – and that’s assuming peace and prosperity. This is unsustainable, a recipe for economic collapse.

In response, President Obama has delivered soaring rhetoric about reducing runaway spending, yet rejected nearly every proposal to do so – including those from his own deficit commission. The nonpartisan Congressional Budget Office (CBO) concludes that the President’s latest budget proposal would, over the next decade, triple the national debt over the level he inherited.

Fixing long-term budget deficits requires first diagnosing their cause. Low taxes are not the problem. Regardless of tax rates, revenues have remained at about 18 percent of national income for the past half-century. Despite a recession-induced dip, revenues are expected to return to that level within a decade – even if all tax cuts are extended.

Spending is another story. Historically 20 percent of national income, federal spending is now at 24 and soaring toward 26 percent of national income by the end of the decade. Over 2030, 2040, and 2050, CBO projects spending to rise to 32 percent, 39 percent, and then 45 percent of national income. In reality, the economy would cease functioning well before then.

Clearly our long-term deficits result from steeply rising spending, not falling revenues. And nearly the entire spending expansion can be traced to Social Security, Medicare, Medicaid, and the resulting interest costs on the burgeoning national debt.

Much of this cost increase is driven by simple demographics: 77 million retiring baby boomers beginning to collect these entitlement benefits. In each program, current taxpayers finance current recipients. This system can be sustained as long as there are enough workers paying taxes to support the benefits of each retiree. In 1960, five workers supported each retiree. Today, that ratio has fallen to 3-to-1, on its way to just 2-to-1 in 2030. In other words, by 2030, every married couple will be funding their own retiree. The burden will be enormous, especially since escalating health care costs also inflate the Medicare and Medicaid tab.

How enormous? Social Security and Medicare face a $38 trillion shortfall over the next 75 years. CBO calculates that simply paying all benefits currently promised would eventually mean putting the middle class in a 63 percent tax bracket, and upper-income families and small businesses into an 88 percent tax bracket. This is a recipe for disaster.

Over the next decade, Washington must address the $21 trillion projected cost of Social Security, Medicare, and Medicaid. The more popular spending cuts, such as foreign aid ($0.5 trillion over the next decade), corporate welfare ($1.0 trillion), war spending in Iraq and Afghanistan ($0.5 trillion) and even ObamaCare ($1.0 trillion) don’t begin to offset those entitlement costs. (Some of those cuts may be necessary, but they are not sufficient). And Social Security, Medicare, Medicaid, and interest costs are set to double again in the 2020s.

The tax side is no different. Repealing the 2001 and 2003 tax cuts for those earning more than $250,000 annually would raise just $0.7 trillion over the decade. Repealing them for everyone – including low-income families – would raise at most $3 trillion. Worse, these tax hikes would kill jobs. And does anyone believe Washington would use new tax revenues for deficit reduction? Every tax increase signed by President Obama has gone toward new spending instead.

Reform must be bold, yet it need not impoverish seniors. Gradually adjusting eligibility ages, reducing benefits for upper-income seniors (while strengthening minimum benefit levels to keep low-income seniors out of poverty), and converting Medicare into a premium support system based on choice and competition (similar to what members of Congress enjoy) can rein in entitlement costs.

Driven by entitlement costs, the national debt is set to reach cataclysmic levels. The question is whether we will roll up our sleeves and reform these programs, or continue to wait in vain for some magical, pain-free solution. The very future of the economy hangs in the balance.

Brian Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs at The Heritage Foundation

First moved on the McClatchy News Wire service