The Budget Issue Everyone Is Avoiding

Volume VII, Number 4 April 26, 2001

The budget negotiators claim to be debating fundamental fiscal choices. Yet the biggest point of disagreement is whether tax cuts should total $1.2 or $1.6 trillion over the next ten years--a difference equal to less than 10 percent of projected budget surpluses, less than 2 percent of projected revenues, and less than one-half of one percent of the projected size of the economy.

Absent from this year's debate is the one issue that really will determine government's size and shape in the new century--the long-term growth in entitlement spending. Neither side has any plan to slow that growth. In fact, to the extent that leaders are talking about entitlements at all, it is to advocate adding new ones.

That's too bad, for the time to address the challenge is now, while the demographics are favorable and the budget is in surplus. Unfortunately, leaders are too busy distributing the near-term fiscal bounty to focus on the long-term fiscal threat looming over America's future.

Fiscal Largesse

For a while in the mid-1990s, it seemed that America was ready to face up to the entitlement challenge. Cost-cutting reform of senior benefits began to move toward the top of the nation's agenda. Commissions were appointed, debates were staged, and talk of stewardship echoed down the halls of Capitol Hill. Then something happened. The deficits turned to surpluses--and all fiscal restraint was abandoned.

Let's leave aside the run-up in discretionary spending over the past three years and focus instead on entitlements. Leaders have repealed the Military Retirement Reform Act of 1986. They have undone, through "emergency spending," the cost-cutting reform of farm subsidies enacted in 1996. They have reinstated Medicare spending trimmed by the 1997 budget deal. And they have repealed the Social Security earnings test and added new health benefits for military retirees.

Negotiators are considering further expansions. The Senate-passed budget resolution would pile on some $600 billion in extra entitlement spending over the next ten years--for Medicare, for farm aid, for health insurance, and for education. The big ticket item is prescription drugs, for which the Senate allocates $300 billion. This may be conservative. According to the CBO, a benefit that pays for just half of Medicare enrollees' prescription drug spending would cost $728 billion.

One might suppose that all this fiscal largesse is made possible by a favorable change in the long-term cost projections. But that's not the case. The recent prosperity has not lowered Social Security's long-term cost rate. In fact, beyond the year 2030, the projected cost rate has actually risen. Nor has it altered the demographic, social, and technological forces driving up the future cost of health care. Far from it: Following the recommendation of an official technical panel, the Trustees this year increased their projection of Medicare's long-term cost rate by a staggering 60 percent.

All told, the CBO projects that federal entitlements will grow by 10 percent of GDP by 2040. This increase is three times what America now spends on national defense. Meanwhile, OMB projects that by 2040 just three programs--Social Security, Medicare, and Medicaid--will account for 77 percent of noninterest outlays.

A Growing Willingness

Ironically, even as the commitment of leaders is ebbing, the public is expressing a growing willingness to consider fundamental entitlement reform. Asked what we should do about Social Security, 58 percent say "big changes" are needed. Asked about Medicare, 57 percent say we should "make major adjustments soon." Most Americans, moreover, understand that closing the gap between what government promises and what it can afford will require someone to give something up.

The one way to mitigate the sacrifice is to boost national savings in advance of the age wave. This is why the Concord Coalition favors using surpluses to reduce the federal debt and fund Social Security personal accounts. And this is why it is as concerned about the rush to increase spending as it is about the rush to cut taxes.