Change Is Needed Now Before Costs Double
What should Congress do to reform entitlements?
The need to reform our entitlement programs, including Social Security and Medicare, is real and urgent. Delaying will only make the problems we face worse. The federal government — both Congress and the White House — has studied this issue six ways from Sunday. We don’t need another commission, or any other delaying tactic. We need to act, and it is Congress’ constitutional duty to take the lead.
In fiscal 2006, federal spending for Social Security, Medicare and Medicaid together totaled about 40 percent of federal expenditures, or roughly 8.5 percent of American gross domestic product. According to the Congressional Budget Office, without reform they will nearly double to 15 percent of our GDP by 2030.
As Federal Reserve Chairman Ben Bernanke said on Jan. 18, “We are experiencing what seems likely to be the calm before the storm. … [S]pending on entitlement programs will begin to climb quickly during the next decade.”
We must act now or we will face substantial benefit cuts, massive tax increases, huge new government debts or, most likely, some combination of all three.
The problem we face is simple demographics. The first baby boomers will start to collect benefits next year, causing Social Security costs to rise. Social Security is fundamentally a “pay-as-you-go” system — payroll taxes from current workers pay benefits for current retirees. When Social Security was first set up, there were many more workers per retirees than there are today. For example, in 1950 there were 16 workers per retiree, but today that number is just more than three workers per retiree. And the ratio is dropping. According to the Social Security trustees’ estimates, from 2009 to 2017 the number of retirees receiving Social Security will grow by 23.9 percent and the number of workers by only 4.3 percent. In other words, the number of retirees will grow more than five times faster than the worker population in the next 10 years.
The best estimate is that Social Security costs will nearly double from $564 billion in 2006 to more than $1 trillion by 2017. Starting in 2017, Social Security tax revenues will fall short of benefits. Between now and 2080, these cash-flow deficits are expected to equal $6.4 trillion in present value.
Because the cost of health care is rising so quickly, Medicare faces an even more dire forecast. As the Social Security and Medicare trustees said in their 2006 report, “Medicare’s financial difficulties come sooner — and are much more severe — than those confronting Social Security.” The trustees went on to explain that the demographic bind facing Medicare is growing even more acute, because the fastest-growing population in America is older seniors — those 85 and up. And those seniors require particularly expensive care.
The payroll tax income that funds Medicare will not — and probably cannot — rise as fast as costs in the present system. Medicare’s annual costs were 2.7 percent of the GDP in 2005, or just more than 60 percent of Social Security’s, but they are now projected to surpass Social Security expenditures in a little more than 20 years and reach 11 percent of the GDP in 2080. That’s more than 10 percent of the entire gross national product of the United States spent on one government program.
In testimony before the House Ways and Means Committee on Jan. 23, John Diamond of the James A. Baker III Institute for Public Policy said that without reforms, “the enormous budget pressures associated with the projected increase in entitlement spending … threaten to undermine the strength of the economy.” He continued, “Reform of Social Security and Medicare should be at the forefront of any policy discussion since these are the heart of the budget problems facing the nation.”
We always should be clear that we will protect the guaranteed benefits of retirees and near-retirees, but we all know that changes have to be made if Medicare and Social Security are going to be available for future generations. Inaction is the greatest enemy of progress. When you’re digging yourself into a hole in the ground, the first step is to stop digging.
As Bernanke said in his Senate testimony, “Addressing the country’s fiscal problems will take persistence and a willingness to make difficult choices.” I understand that such reforms will be politically difficult. I can predict some of the arguments that partisans on both sides will make. Some liberals will want to wait for a Democrat in the White House. Some conservatives will want to wait until Republicans take control of the House and Senate. But that sort of thinking has led to 20 years of kicking the can down the road on this issue — while the problems have only gotten worse. The fact is entitlement reform is an issue so big that it must be bipartisan.
What are our other options? Failing to act ultimately will lead to severe benefit cuts, drastic tax increases, unprecedented debt or severe cuts in other government programs. If we do not reform these programs, we will be breaking the promise that each generation of Americans makes to the next — to leave the country better and stronger for our children and grandchildren.
Rep. Jim McCrery (R-La.) is ranking member of the Ways and Means Committee.