April 20, 2014

Fiscal Reform Must Tackle Washington's Unrealistic 'Promises'

In his State of the Union Address President Obama declared: “Our government shouldn’t make promises we cannot keep, but we must keep the promises we’ve already made.”

It was good applause line, but it glossed over a key point: The promises we’ve already made are the ones we cannot keep.

It is widely accepted that current fiscal policy is unsustainable. By definition, that means something has to change. Yet, if we decide that all promises must be kept, we can’t change anything without “breaking a promise.”

The dilemma for policymakers in Washington is that for years they have made unfunded promises and there is no politically convenient way to reverse this.

The first thing to do is just face up to it.

That’s why a bipartisan group of former members of Congress included this warning among their findings from their Strengthening of America forum series last fall: “We cannot put our debt on a sustainable path without reductions in the projected cost of entitlement programs, cuts in discretionary spending and higher revenues.”

Strictly speaking, any of those things could be characterized as breaking a promise.

It could be argued, for example, that the government currently promises a certain level of services, including national defense, transportation, educational aid, law enforcement, environmental protection, health care research, low-income health care benefits, housing assistance, border patrol, food safety, agricultural subsidies, disaster relief, unemployment compensation, and any number of other things.

It could also be argued that there is an implicit promise to keep revenues from rising beyond “traditional” levels, generally thought of as the past 40-year average, while simultaneously providing tax breaks for many favored activities such as employer-provided health insurance, borrowing to purchase a home, and charitable contributions.

But of course the biggest promises, and the ones most relevant for the future, are the promised benefits for the two major social insurance programs: Social Security and Medicare. These two programs promise benefits far into the future based on a current revenue stream that can’t support them. According to the Social Security and Medicare trustees, the net present value of the shortfall for these programs is between $38 trillion and $48 trillion over the next 75 years.

Already, the respective Social Security and Medicare Part A payroll taxes do not bring in enough money to cover the cost of benefits that are currently being paid. This gap is projected to grow wider as the huge Baby Boom generation moves steadily into its retirement years.

Medicare Parts B and D collect premiums from beneficiaries who sign up, but these premiums are set to cover just 25 percent of the cost. The remainder is paid for out of general revenues.

All this puts an increasing strain on the budget.

As noted by the Congressional Budget Office (CBO) in its 2012 assessment of the long-term budget outlook, “The aging of the population and the rising costs for health care mean that the combination of budget policies that worked in the past cannot be maintained in the future.”

In his speech, the President seemed to acknowledge such concerns when he said “those of us who care deeply about programs like Medicare must embrace the need for modest reforms. Otherwise, our retirement programs will crowd out the investments we need for our children and jeopardize the promise of a secure retirement for future generations.” 

So which promises must be kept?

Absent change, Social Security, Medicare, Medicaid and other health care “entitlements” will increase federal spending by five to six percent of GDP over the next 25 years – nearly the size of all discretionary programs in the budget, assuming that current caps are maintained.

If all benefit promises for Social Security and health care must be kept, then the only policy responses available to avoid unsustainable deficits would be to raise taxes to pay for them on an ever-escalating basis or to virtually eliminate most of the remaining government programs.   

Neither of those options is feasible nor desirable.

It is clear that future benefit promises cannot be carved in stone. They have been changed in the past and they will need to be changed in the future. Simple prudence should tell us not to tie Congress' hands by putting any part of the budget beyond the possibility of democratic review. What we need are honest accounting and an open debate, not a guarantee of “promises kept.”  

President Obama was right to acknowledge that the government shouldn’t make promises it cannot keep. If he wants this to be a reality, however, it is crucial to also acknowledge that reform of our existing programs is not the same thing as breaking a promise. But if we do want to think in terms of promises, why not promise an overall fiscal policy that is sustainable?