Making a bad train wreck worse
For years, economists, special commissions, blue-ribbon panels, think tanks, and scores of other observers have been sounding the alarm bells about the United States' looming entitlement crisis. The great wave of retiring baby boomers is going to push Medicare and Social Security into insolvency. Taxes will have to skyrocket to pay for the tens of trillions of dollars in promised benefits. Without major changes, just a handful of entitlement programs are on course to eventually consume all federal spending.
The Concord Coalition, a bipartisan group founded by Warren Rudman and the late Paul Tsongas, warns that the impending trouble "threatens to overwhelm the federal budget - and to transform the very shape of our national economy, our society, and even our culture." And they don't mean for the better.
Well aware of the train wreck ahead, what course of action do our nation's fearless leaders in Washington take? They create a new entitlement program!
One major political party is content with enacting a prescription drug plan that could cost $1-$2 trillion in the second decade alone. The other major party refuses to vote for the plan - because it doesn't spend enough money!
Message to Congress and the President: We are headed for a crisis. The Social Security Advisory Board, an independent bipartisan board created by Congress, warns that if the system is not reformed, in 2038 and later years the percentage of elderly people living in poverty will rise and the "standard of living of retirees would fall quickly and continue to fall over several decades." And they're just talking about retirees. Workers' predicament will be even worse, and will come much sooner. In fact, workers' standard of living is already negatively impacted by Medicare and Social Security - directly through hefty taxes, and indirectly through slower long-term economic growth than would otherwise be the case.
Medicare is a bigger ticking time bomb than Social Security. Whereas the latter's unfunded liabilities total about $7 trillion, Medicare's projected shortfall is more than $30 trillion, according to an American Enterprise Institute report by professors Jagadeesh Gokhale and Kent Smetters. They say that to make the two programs solvent, payroll taxes would have to immediately almost double (and the revenue invested in securities paying an annual real return of at least 3 percent). Alternatively, Social Security and Medicare benefits would have to be cut by more than 40 percent immediately. For each year that passes without reforms, they admonish, the fiscal imbalance will grow by about $1.4 trillion.
That assessment was done before the prescription drug bill passed. Now, the numbers are even worse.
The prescription drug plan obviously will hasten Medicare's day of reckoning. It actually has been suggested that this is a good thing, because it will force Congress to deal with the problem sooner rather than later. If you like higher taxes, then it is perhaps a good thing.
Under a less likely scenario, Congress could do the responsible thing and transition Medicare from a "pay-as-you-go" program toward a "pre-funded" program by establishing mandatory medical savings accounts.
Could hastening Medicare's insolvency - and achieving the second scenario - have been the Republican leadership's secret motivation for passing the prescription drug bill all along? Nah. No one's that smart, and they're not that stupid. (That's a paraphrase of the then-president of Coca-Cola, responding to a suggestion that the company secretly planned all along to unveil New Coke and then go back to Coke Classic, just to bolster market share.)
There may not even be an explicit day of reckoning at all. The boiling frog principle applies here. Like the frog that doesn't notice the gradual rise in water temperature, the tax burden will gradually creep up, long-term economic growth will taper off, entitlements will steadily crowd out traditional government expenditures, and our overall standard of living will decline.
A vicious circle could ensue. With slower economic growth, incomes will not be able to keep up with health care costs. Politicians, not realizing that bloated entitlement programs are the prime culprit, will try to remedy the problem by spending even more taxpayer dollars on health care.
That will produce even slower economic growth, and so on.
One of the reasons people like myself support tax cuts is that they are one of the few mechanisms available to restrain politicians from spending the country into oblivion. Our leadership has just turned that theory on its head.
When your entitlement programs are manifestly unsustainable, piling on even more entitlements is not the thing to do. Lots of folks still are in denial of that reality.