Commentary
4:17 pm
Fri September 6, 2013

The Great Society Meets Fiscal Reality

The Great Society Meets Fiscal Reality

Someone wise in matters of politics once said that programs for the poor are poor programs.  It remains true today – initiatives aimed at helping the most vulnerable in our society, be they privately or publicly funded, seem to be perpetually starved for funds.  And so the genius of those who created the Social Security system – originally aimed at older Americans whose assets were devastated by the Great Depression in 1935 – was to make the program available to all, regardless of income.

In a few short decades, the once-prevalent stigma of being on “the dole” by receiving government checks was replaced by a feeling of ownership and entitlement, as all but a tiny fraction of Americans bought into the idea that the checks they received – on green paper stock in the paper check days -- were earned through contributions paid during their working lives.

That buy-in translated into broad political support for both Social Security and its close cousin, the Medicare program instituted in 1965, that continues to this day.  As a result, these are not poor programs, by any stretch of the imagination.  More than 51 million people benefited from the $1.3 trillion in Old Age Survivors Insurance, Disability Insurance, and Medicare funds dispensed this year.

But the genius of design that helped these programs achieve such broad-based support also contained the seed of their demise, because their growth has changed the nature of government.  In terms of dollars, the single most important task of Federal government today is to transfer dollars from those of working age to those who have retired.  No other activity, be it defense, education, or roads and parks, even comes close.

And the commitment to do the same for the decades to come has implications that are astonishing. 

We seem to be slow to wake up to that fact, yet awareness is growing.  We still tend to kill the messengers who bring us this bad news.   

“Fiscal cancer” was the term used by the nation’s then-chief accountant, Comptroller General David Walker, when he spoke in Missoula five years ago about the crisis in entitlements.

The analogy is apt.  Like a dysfunctional organism, growth in the future liabilities for publicly funded health care entitlements in particular have been super-fueled as three powerful trends come together:  increased longevity, the growing numbers of baby boomer retirees, and the higher utilization rates of ever more complex and expensive health care technologies that have made total costs rise much faster than the economy in general and tax revenues in particular.

The result is that the unfunded liability for the Medicare program alone – the amount of funds we would have to collect and set aside today to fund the commitments we’ve made for future retirees -- is now five times larger than Social Security.  The irony is that it could be the social welfare programs that are rich and those unlucky enough to be working and hence taxed to pay for them that will be poor.

Yes, this is an overstatement.  But not as much as you might think.  Because when you look at the numbers, as the Congressional Budget Office has, the changes needed to right the ship are big.

Let’s start with a working number.  900 billion dollars.  That’s how much CBO estimates is needed to cut the gap between federal spending and tax revenues every year to get deficits on a sustainable course. 

Don’t confuse this savings target with the decline in federal deficit that has occurred coming out of the recession.  This estimate has nothing to do with recessions and recoveries.  This is the permanent reduction in the gap between the trajectory of spending and revenues from where they are projected to go today.

There are essentially three ways to achieve this.  The first is to raise taxes substantially – to levels significantly above their long-term post-war average.  The second is to restructure the entitlement programs, making major changes in the kinds of benefits that older Americans receive.  The third option is to substantially reduce the role of the federal government in everything else it does – from national security to farm support.

Let me give you an idea of the size of some of these changes.  If we did nothing but raise taxes, increases would have to be about a sixth of what we’re paying today.  For all of this extra pain we get nothing more than simply the ability to keep funding the status quo.  If all of the changes occurred just in Social Security and Medicare, the cuts would amount to about a quarter of the total spending on those programs.

We all know that our federal tax system is a mess, and raising taxes in the existing system just makes all of its warts even worse.  But just to give you an idea of the magnitude of tax changes needed to balance our books on an ongoing basis, let me tick off some possible changes for personal income taxes.  Eliminate the mortgage interest deduction.  Eliminate the deduction for state and local taxes.  Raise tax rates on those earning $250,000 or more.

Not pleasant.  But CBO estimates that even enacting all three of these unpopular changes would raise less than half the extra revenue needed.

Or how about these changes to entitlements.  Raise the Medicare eligibility age to 67.  Raise the Social Security age to 70.  Link cost-of-living adjustment to a more slowly growing price index.  Convert the Medicaid payments to state to block grants.  Increase Medicare Part B premiums.  All of these changes hurt older Americans but help address the funding imbalances.  But the truth is that all of them taken together get us only part of the way to where we need to go.

To say that our political leadership has failed to address this problem would be an understatement.  Each of the last two administrations has managed to add new entitlements to the mix.  We continue to engage in poisonous or misleading rhetoric, referring to reform proposals as heartless or radical, or suggesting that tiny, painless changes can solve the problem.

Older Americans will scream foul, and it’s hard to blame them.  But its fair to say that the unthinking support we’ve given these universal entitlements does need to be rethought, no matter how unfair or heartless that might appear.  Because the problems in funding them are coming home to roost.

The good news is that the imbalance is solvable, if we would only find the courage to face it honestly.  As the economist Herbert Stein famously once said, things that can’t go on forever usually don’t.

Tags: