Seniors Still Come First In The Budget

Volume IX, Number 2 March 19, 2003

The 2003 Trustees' reports, released this week, confirm that senior entitlements are unsustainable without major reform. According to the Trustees, the cost of Social Security and Medicare is due to grow from 7 to 16 percent of GDP by 2075. The increase alone--9 percent of GDP--is two and one-half times everything the United States now spends on national defense. A couple years ago, many expected that we could defray much of the cost of the age wave by setting aside growing near-term budget surpluses. With the budget again deep in deficit, that expectation now seems quaint. So how are America's leaders responding? Instead of restraining senior entitlements, Congress is busy debating benefit hikes and tax cuts that will tilt the budget even more toward the elderly. Ironically, this outcome seems to alarm neither big government liberals nor limited government conservatives. Defending the entitlements status quo is a bipartisan enterprise.

The Spending Side

Since 1965, benefits to seniors aged 65 and over have risen from 16 to 35 percent of the budget. And this is before the age wave rolls in. By 2050, according to OMB, the big three senior benefit programs--Social Security, Medicare, and Medicaid--will be consuming two-thirds of all noninterest outlays. Current proposals before Congress would push the senior share of the budget even higher. Both the House and Senate budget resolutions would create a Medicare prescription drug benefit costing $400 billion over the next ten years. The proposal is not as expensive as the Democratic alternatives. Moreover, at least in the House version, the cost would be partially offset by savings elsewhere in Medicare. Still, if passed, the drug benefit would be the largest entitlement expansion in a generation. Adding a prescription drug benefit to Medicare is certainly a worthy goal. But with the latest data showing that one in six Americans under age 65 lack any health insurance at all, one wonders why Congress' first thought is to give more to those who already have most.

The Tax Side

Let's not forget: Tax cuts also favor the old to the extent they lead to deficits that the young must pay. On the tax side, it is the Republicans who are leading the charge. Both the House and Senate budget resolutions include almost the entire $1.6 trillion in tax cuts proposed by the administration. And this is on top of the $1.3 trillion in tax cuts Congress passed two years ago. Beyond the deficit impact, the administration's dividend tax cut directly favors the elderly since the elderly collect a disproportionate share of taxable dividends: roughly 50 percent. If the administration had cut dividend taxes at the corporate level, the reform would benefit all age groups equally. As it is, it piles yet another tax favor on America's most favored age group. Some Republicans are trying to sell the tax cut on precisely the grounds that it would help seniors. In fact, it isn't seniors who need the help at tax time. Consider a typical example. A 35-year-old working-age couple with one child and $50,000 in self-employment income paid $10,309 in federal taxes in 2002. A 70-year-old retired couple with the same $50,000 in income, split evenly between Social Security benefits and taxable investment returns, paid just $1,211.*

Business as Usual

In the aftermath of 9/11, our nation embarked on a global war against terrorism that may require us to commit vast new resources far beyond those already budgeted. As part of this war, young Americans are now being called on to risk their lives in battle. Yet in the budget debate, it's still business as usual. It's time Americans opened their eyes and confronted the fiscal and economic threat looming on the horizon as directly as we are confronting the security threat.

* Assumes both couples take the standard deduction. For further details on how the tax code favors seniors, see our fax alert of July 20, 2000.