Attention: Deficit

Should progressives embrace entitlement reform? Or look elsewhere to narrow the gap? An exchange between two leading fiscal experts.

Isabel Sawhill: The growth of entitlements is on an unsustainable path. If allowed to continue, spending on Social Security, Medicare, and Medicaid will require untenable tax increases, crowd out almost all other spending, or lead to a dangerous accumulation of debt. If any of these scenarios unfolds, the nation’s ability to remain economically competitive will be substantially weakened, and enormous burdens will be imposed on the poor and middle classes.

As all sides in the debate know well, the politics of entitlement reform are toxic. Only 7 percent of the public is in favor of cutting spending on either Social Security or Medicare. Shielding these programs from change–almost any change–has been a winning hand for progressives in the past, including in 2005, when George W. Bush’s Social Security privatization efforts crashed. But it’s a political strategy that may jeopardize the entire liberal agenda going forward.

First, preserving the status quo will erode trust in government. A government that has lost control of its fiscal future, with most of its budget on automatic pilot and a fifth of its expenses unpaid for, cannot garner much respect from its citizens. The Urban Institute’s Eugene Steuerle calls this a decline in “fiscal democracy,” because mandated spending–the product of past decisions–absorbs all revenues, leaving no scope for policy innovation if these programs are considered untouchable. Already the “big three” entitlements are absorbing 71 percent of all revenues. The erosion of trust that fiscal indiscipline engenders will, over time, leave the party that wants to use government for progressive ends unable to win elections. We are already seeing public frustration with fiscal profligacy producing political victories for those who seek to minimize the activist state.

Second, preserving these programs is a transactional strategy that, despite its political benefits, is at odds with transformational ideals such as providing greater prosperity and opportunity for all Americans. If progressives care about protecting the less advantaged along with other social programs, finding savings in the big three entitlement programs will be essential. Unless we free up resources to invest in education and job opportunities for younger Americans, and provide a healthy start for children from less advantaged families, prosperity and opportunity will elude us. The rapid growth of spending on entitlements has already forced the Obama Administration to propose a freeze in non-security domestic spending. In California, Governor Arnold Schwarzenegger has proposed eliminating the state’s welfare-to-work program as well as most child-care assistance for low-income families, a harbinger of what may happen at the national level as the budget squeeze plays out over the next decade or two.

Third, the higher tax rates that unreformed entitlements will demand in the future will be even more unpopular than making the needed reforms now. Without reform, taxes would have to double or triple by 2050, according to the Congressional Budget Office (CBO). There is no lock box out of which the government can fund the costs of those who are retired. Yes, there are trust funds for Social Security and a portion of Medicare, but these funds contain nothing more than paper IOUs, not real resources that can be used to pay the costs of these programs. There are only today’s and tomorrow’s workers, whose capacity to pay the retirement costs of their parents’ generation will depend on earlier investments in their own education and other productivity-enhancing programs. Higher taxes are inevitable, but a doubling or tripling of taxes for working-age families is neither economically sensible nor politically feasible. Even before the current recession, the high costs of housing, child care, and college tuition left their wages stagnant, their job security threatened, and their pocketbooks flattened.

Reforms enacted now can be phased in gradually–no one need be seriously hurt in the process. Pushing through such changes now would send the right signals to financial markets, while slowing their implementation would provide time for the economy to recover from recession and for those approaching retirement to adjust to any reform.

What kinds of changes should progressives support? First, because health care is the biggest problem we face, we should craft reforms recognizing that not all spending on health care improves health. Second, reforms should trim benefits for the more affluent while protecting those at the bottom. Third, reforms should leave our core commitments to Social Security and Medicare intact and ensure that no one is left bereft of access to basic health care and a decent income in old age. It is only by returning these programs to solvency that we can ensure that they will be there for those who need them most.

Everyone knows that health care is the big enchilada. The recently enacted Affordable Care Act expands access to health care, but its effects on projected deficits and health-care spending trajectories are very small and highly uncertain. (For more on the health-reform legislation, see Jacob S. Hacker’s piece, “Health-Care Reform, 2015,” in the current issue.) While a portion of the projected increase in Medicare and Medicaid spending can be attributed to the aging of the population, a bigger portion is due to rising health-care costs per capita in the public and private sectors. Health spending has grown about 2.5 percentage points faster than the economy over the past four decades. If this trend continues, Medicare and Medicaid alone will absorb every dime of federal revenues at current tax rates by some time in the 2040s. These cost increases are driven by the availability of new and better treatments and drugs, the open-ended, fee-for-service nature of the system, and a lack of incentives for either providers or beneficiaries to control costs given that most of the bills are sent to third parties (either employer-based insurance plans or the government).

• 1
• 2
• 3
• 4
• 5
• 6
• 7
• 8
• 9

Post a Comment