Most significant, neither the president nor Republicans are offering any serious structural reforms to entitlements, especially Social Security, Medicare, and Medicaid. Those three programs alone constitute 44 percent of federal spending this year, and by 2022, they will amount to more than 54 percent of the federal budget. Worse, the real explosion of entitlement costs takes place just outside the ten-year budget window currently being debated. While entitlement changes will appear to have only a moderate impact on this budget deal, failure to reform these programs will guarantee an unsustainable growth in federal spending over the long term.
Social Security, for example, ran only a $165 billion deficit this year, and in part this is due to the “temporary” payroll-tax cut that some now want to make permanent. But even beyond the shortfall that cut produces, Social Security was $53 billion in the red this year. By 2022, Social Security deficits (technically, redeeming the bonds in the Social Security Trust Fund) will consume $345 billion in general revenues. But that is just the tip of the iceberg. According to the latest report of the Social Security Trustees (page 15), the present value of the program’s unfunded liabilities is $20.5 trillion.
Medicare’s impact on the budget is even worse, in both the short and the long term. This year alone, Medicare will add some $300 billion to the federal deficit. According to the program’s trustees, its unfunded future liabilities run to more than $42 trillion. But that is actually a best-case scenario that assumes a significant decline in health-care costs and the success of several cost-control measures that are part of Obamacare. If those savings don’t materialize, Medicare’s liabilities could easily run as high as $90 trillion or more. And federal Medicaid spending is expected to rise from $253 billion this year to more than $592 billion by 2022, driven in large part by Obamacare’s expansion of the program. And then after that, Medicare spending really takes off.
In response to this looming entitlement cliff, President Obama has offered an additional $340 billion in Medicare cuts (relative to the rate of growth) over ten years. Some of these proposals are legitimate ideas for cost savings, such as reducing the government’s responsibility for bad debts that hospitals and nursing homes have failed to collect from patients, and charging higher premiums to high-income Medicare beneficiaries. But cuts of less than $35 billion per year are not going to make a dent in the program’s long-term liabilities. More important, the president makes no structural changes to the program itself, meaning that the skyrocketing growth will continue virtually unabated. And Social Security and Medicaid? The president’s proposal takes them both completely off the table.
As elsewhere, Republicans do a bit better on entitlements, but only because the president has set the bar so low. The Republican proposal would reduce the rate of growth in federal health programs by $600 billion over the next ten years, with the largest part of that coming from Medicare. Proposals such as raising the eligibility age to 67 reduce spending by less than most people realize in the short term (approximately $150 billion over ten years, in this case), but do lock in substantial savings over the longer term. Still, Republican plans fall far short of the restructuring envisioned under, say, the Ryan budget. That may simply be facing up to political reality, but it won’t come close to making the program solvent.
Republicans have also shown a willingness to take a substantial political risk by calling for Social Security reform. But their proposal for reducing the growth in cost-of-living adjustments (COLAs) would save only $200 billion over ten years, not close to what the system owes. Republicans also promise to reduce spending on Medicaid, although details are lacking.
But what both sides seem to concede is that government will in the future be spending a lot more money than it is today. Whether it gets that money through debt or taxes is only one small part of the problem. Both options take resources from the productive sector and transfer them to government, and as a result, we can expect to be far poorer as a nation in the future. That is a much more important issue to debate than tax pledges.