Policy: Entitlements

Reform entitlements --- or go bust

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Opinion,Op-Eds,Medicare and Medicaid,Social Security,Entitlements,Budgets and Deficits,Minusextra,Spending,Magazine

The president can delay his budget, but no good can come from further postponing our country’s desperately needed financial reforms.

The White House announced that President Obama's proposed budget for fiscal year 2015 will be released on March 4, roughly one month behind schedule. Of course, far more important than the budget's submission date is its content. Unfortunately, there is every reason to expect that, like the president's recent State of the Union address, this year's budget submission will represent another critical missed opportunity to address escalating federal fiscal problems -- while they still can be solved.

Implicitly, every presidential budget is a compilation of the president’s policy choices, and this budget will be no exception. Election year budgets in particular often highlight issues that differentiate the president’s views from his political opponents’. But as we prepare to receive President Obama’s next budget in its political context, it is worth understanding how the country’s fiscal policy challenges appear when politics are subtracted from the equation.

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Among the most important points to be understood about the budget is that the U.S. government continues to spend far more money than it collects in tax revenues, causing debt to accumulate at unsustainable rates. Whereas federal debt held by the public equaled 35 percent of our total economic output as recently as 2007, its size had soared to 72 percent by last year. The Congressional Budget Office sees it rising further to 79 percent of our economy by 2024 and climbing even higher afterward. Even this dire projection optimistically assumes that various forms of budget discipline under current law will be observed in the future, although they have not been in the past.

This unsustainable debt accumulation represents a clear and present danger to our economic well-being. When the federal government runs deficits, it soaks up the capital available for individuals to borrow and for businesses to invest, grow and create jobs. Specifically, we cannot afford to leave our debt growing faster than our economy's ability to keep pace. If we are not actually buying down the debt, prudent fiscal policy adjustments require having it grow more slowly than our economic output. Such action is necessary to ensure that our children's standard of living is not permanently lowered by their carrying substantially heavier debt burdens than were shouldered by any previous American generation.

America’s rising debt is the accumulation of years of deficits, notably including the exceptionally large deficits of the last few years. Deficits embody the difference between spending and revenues; a closer look at this difference reveals that the nation’s fiscal predicament is exclusively a spending-driven phenomenon. Currently, and in future projections, federal revenue collections actually exceed the historical average of 17.4 percent that was collected when deficits were far smaller.

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Our deficits arise solely because spending has grown dramatically beyond historical norms, even relative to today's larger economy. Although it is fashionable for politicians to discuss the tax side of the equation to make arguments about fairness or income distribution, that discussion is essentially unrelated to the root of America's fiscal problem. Unless debt and/or taxes grow faster than the economy can sustain, the rate of federal spending growth must be slowed.

In addition to the interest costs that arise from these deficits, federal spending growth is concentrated in four programs: the federal government's three major health entitlements (Medicare, Medicaid and the Affordable Care Act, often called Obamacare) and Social Security. The CBO's projections indicate that all other spending is on a manageable course, although spending growth in the Big Four alone is sufficient to cause all of the nation's fiscal problems. If the budget submission were solely about achieving sustainable federal finances, it would contain concrete recommendations to slow the growth of spending on the Big Four.

Budget considerations are not the only reason to constrain cost growth in the Big Four spending programs. Another is that without reform, Medicare's Hospital Insurance program as well as Social Security will become insolvent. The impending depletion of Social Security's disability insurance trust fund has already grown urgent, with the program's trustees anticipating insolvency in 2016. The CBO puts it in early 2017. Either way, without reform, disabled beneficiaries face sudden benefit cuts of 20 percent.

Presidential leadership on Social Security would involve proposing reforms to place it on a financially sustainable course. Instead, some have suggested that the problems in Social Security disability insurance simply be papered over in the near term by tapping revenues now earmarked for its retirement fund. But this is merely an avoidance tactic that by itself would ill serve participants on either side of Social Security. Social Security’s retirement trust fund cannot afford to cough up the money; furthermore, over the long term, it faces an even larger financing problem than the disability side. The program’s total shortfall has already grown far larger than that resolved with so much difficulty during its 1983 financing crisis. No good can come from further postponing needed reforms to both sides of Social Security.

As with Social Security, there are multiple reasons to lower the projected growth of federal health programs. Among them is a new appreciation of the economic policy damage caused by their current designs.

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The CBO's latest report shows deficits during the 2014-2023 period that are about $1 trillion higher than projected last year. For the most part, this is accounted for by lower projected individual income tax revenue collections, primarily because the CBO has reduced its projections of the total amount of wages and salaries over the 2015-2023 period by about $3.2 trillion (or 3.6 percent) since last year. In turn, this slow growth in worker wages reflects the movement of the baby boom generation onto the retirement rolls, in addition to sobering findings of “reduced incentives to work attributable to the Affordable Care Act.”

The CBO anticipates that workforce participation will continue to plummet in upcoming years, with troublesome consequences that include slower growth, lost job skills for workers, lower tax revenues, higher expenditures on programs such as the Earned Income Tax Credit and higher federal deficits.

Again, if the president's budget were submitted in a political vacuum, it would undoubtedly contain proposals to scale back the rising costs of Medicaid expansion as well as the ACA's new health exchange subsidies, both for direct fiscal reasons as well as to repair some of the documented damage these ACA elements are causing the labor force. Unfortunately, all indications are that the White House's political investment in the ACA is tempting it to try to spin these problems away rather than forthrightly acknowledging them and pursuing the necessary corrections.

The budget that America needs — versus the more likely budget shaped by concurrent political forces — are two very different things. As we prepare to receive and evaluate President Obama’s next submitted budget, it is worth knowing what a set of budget proposals would look like if focused on solving our escalating fiscal problems. Such a budget would rein in the growing cost of Social Security, Medicare, Medicaid and the ACA. The extent to which the coming budget diverges from this blueprint is the extent to which other policy agendas are diverting us from urgently needed fiscal repairs.

CHARLES PAUL BLAHOUS is a senior research fellow with the Mercatus Center at George Mason University, a research fellow at Stanford University's Hoover Institution, one of two public trustees for the Social Security and Medicare programs, and formerly served as President George W. Bush’s deputy director of the National Economic Council.

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