The Missing Issue In The Campaign

Volume VI, Number 9 August 29, 2000

Last month, the CBO released a study that tallies up federal spending on the elderly and children. It shows that, per capita, spending on the elderly towers seven-to-one over spending on kids, and that, overall, it consumes 35 percent of the budget. This is before the age wave even begins to roll in. By 2050, according to the White House, the major senior benefit programs will consume an incredible 84 percent of budget outlays. It would be hard to deny that the rising cost of senior benefits is one of the biggest challenges facing national policymakers in the twenty-first century. How to control that cost ought to be a central issue in the presidential campaign. But the candidates are apparently more comfortable talking about intangibles like values and leadership than about fundamental resource trade-offs. And when they do raise concrete policy issues, from school standards to law enforcement, the issues are often ones over which, unlike senior benefits, the federal government can exercise little direct control. To be sure, the candidates acknowledge that changes are needed in Social Security and Medicare. But so far, they are avoiding the real challenge, which is to make the programs affordable and sustainable in a much older America. Instead, they are promising to expand them-through prescription drug coverage, through new benefits for working moms and widows, and through personal accounts that require no new contributions. America's leaders face a choice. They can address the aging challenge while the economy is booming, the budget is in surplus, and the demographics are favorable. Or they can delay and deny until the window of opportunity closes. Either way, America will change course. But only if we act sooner will the change give everyone, old and young, time to adjust and prepare.

A Lopsided Advantage

Let's start with some background. Even after the New Deal, spending on the elderly-that is, Americans aged 65 and over-long occupied a relatively modest corner of the federal budget. It was in the 1960s and 1970s that the great expansion began. Congress legislated large hikes in Social Security benefits and enacted Medicare and Medicaid-just before the postwar Baby Boom ended, productivity and real wage growth slowed, and health-care inflation accelerated. From 16 percent of the budget in 1965, senior benefits grew to 24 percent by 1980. They have kept growing ever since, to 29 percent in 1990 and to 35 percent in 2000. Even this number understates the "senior" claim on the budget, since it excludes retirement benefits to the near-elderly. Adding in these benefits-to Social Security retirees aged 62 to 64 and to civil service and military pensioners-raises the total to roughly 40 percent. Spending on the elderly has thus come to dwarf other priorities, from defense (16 percent of the budget) to children (10 percent). This year, according to the CBO, the federal government will spend $17,688 per capita on Americans aged 65 and over versus $2,491 on those under age 18-a lopsided advantage of seven-to-one. What's most remarkable about the growth in senior benefits is that it has continued with only an occasional pause for four decades, no matter what the party in power and no matter what the fiscal and economic outlook. Somehow, it's never the right time for reform. When economic times are bad, the argument in favor of spending more on the elderly is that they are vulnerable and dependent. When times are good, the argument is that younger adults are going to be so affluent that it would be criminal not to share their wealth with the old. Neither argument withstands scrutiny. The elderly, for one thing, aren't as vulnerable as they used to be. Over the past quarter-century, the real median income of households aged 65 and over has risen by over one-third, while that of households under age 45 has remained virtually stationary. Today, elderly household income per capita is about on par with the national average-and that's before taxes, where the elderly enjoy huge advantages. (See our alert of July 20.) Beyond income, the elderly have a higher average net worth than younger adults. And, counting in-kind benefits like Medicare, their poverty rate is as low as the rate for any age group and just one-half the rate for children. The premise of the second argument-that the young can finance current-law senior benefits and still enjoy big gains in after-tax living standards-is equally mistaken. In fact, hiking taxes to pay for the growth in senior benefits would, under SSA's official economic and demographic scenario, erase nearly nine-tenths of all growth in pretax worker earnings over the next fifty years. And this projection may be optimistic, since it assumes that longevity and health costs will grow at just half their historical rates. Under a "high-cost" scenario, after-tax earnings could suffer a catastrophic decline.

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The Inevitable Consequence

For a while in the mid-1990s, it seemed that America was ready to change course. The fiscal situation was so grave-and the elderly had made such evident economic gains-that cost-saving reform of senior benefits began to move toward the top of the national agenda. Commissions were appointed, debates were staged, and talk of "stewardship" echoed down the halls of Capitol Hill. But then something happened: The deficits turned to surpluses. Without a near-term crisis to focus attention, all fiscal restraint was abandoned. Over the past two years, leaders have agreed to repeal the Military Retirement Reform Act of 1986, eliminate the Social Security earnings test, roll back the Medicare savings of the 1997 budget deal, and enact a new long-term care benefit for federal retirees. They have also seriously debated even larger benefit expansions, including prescription drug coverage for Medicare and a reduction in the Social Security benefit tax, each of which would cost the budget several trillion in today's dollars over the next seventy-five years. All of this promises to worsen fiscal projections that are already unsustainable. According to the latest White House budget, spending on Social Security, Medicare, and Medicaid-whose expected cost growth is due almost entirely to nursing home care for the elderly-will increase by 9 percent of GDP from now to 2050. This must result in one of three outcomes: large tax hikes, resurgent deficits, or the withering away of the rest of government. The White House assumes the third will happen, meaning that spending on the poor, on infrastructure, and on defense will steadily decline decade after decade. By 2050, the big three senior benefit programs will be consuming 84 percent of budget outlays. Is this really the bridge to the twenty-first century Americans want to build? Does anyone believe that the federal government's sole function should be to transfer income to old people? Of course not. But this is the inevitable consequence of adhering to two widely held -and entirely contradictory-goals: limiting the size of government and not touching senior benefits.

Doing Better by Our Kids

The 1990s emerged as era of renewed attention to the needs of children. We all want to do better by our kids-in school, in the media, on the streets. But what about in the budget? Will today's children have the resources, when they become tomorrow's adults, to overcome the perils and build on the opportunities of the world they inherit? Think about the passion with which we protect them from physical and moral harm today. Shouldn't we apply that same passion to protecting them from fiscal and economic distress tomorrow? To ask the question is to answer it. The problem is that taking action requires facing trade-offs between senior benefits and other priorities that few leaders-and neither candidate-yet seem willing to make.

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