Back in college, I had a text book entitled “Decision by Debate.” The underlying premise of the book was that if you had a good debate you were likely to end up with a good decision. It strikes me that the inverse of this lesson—that if you have a bad debate, you’ll end up with a bad decision—may explain much of the problem this country is having with budget policy.
Much of what is commonly being said about the federal budget – including the causes of the mismatch of revenues and expenditures and the options we have for resolving that imbalance -- is either mischaracterization or flatly wrong. When you slice through all the heated rhetoric, the budgetary choices we face may be painful, but they are actually much simpler to make than the debate would suggest.
While we don’t have a short-term budget deficit problem, we do have a long-term one that could become relatively serious if not addressed. It is not that government spending is out of control— we will spend less in the coming year on actually running the departments and agencies of the federal government in real per capita terms than we did a quarter century ago during Ronald Reagan’s last year in office. The problem is the checks the government sends to people each month and the payments it makes to their healthcare providers—what Washington likes to refer to as entitlements.
But entitlement is a highly misleading word if you really want to know what is going on. We have dozens of federal entitlements and they make payments to all kinds of people for all kinds of reasons, ranging from crop subsidies to student loans to unemployment benefits. While there are a lot of entitlement programs, only three are big enough and growing fast enough to have a real impact on the trajectory of government spending. Social Security, Medicare and Medicaid account for 71 percent of all government spending other than the third of the budget dedicated to defense and government services and agencies – so called discretionary funds. Over the past quarter century these three major entitlement programs have accounted for more than 100 percent of the growth in real per capita federal spending and more than 100 percent of the growth of government as a percentage of the overall economy.
The growth in these three programs has been driven primarily by the aging of the U.S. population. Over the past quarter century the number of Americans over the age of 65 increased at a rate of half a million a year. But the big story is what is happening now. Starting in 2011 the elderly population began to grow by a million and a half a year—three times as quickly as before and a trend that will continue in the decades to come.
One other fact is worth noting: Over the past fifty years we have brought about a remarkable transformation in the nature of retirement and the quality of life of our senior citizens. In 1959 more than 30 percent of seniors lived in poverty and only 25 percent had health insurance. Now, nearly all have health insurance and less than 9 percent live in poverty, the lowest of any age group. But providing these benefits has required a substantial commitment on the part of the federal government.
Unfortunately, many seniors still live close to the edge. The average Social Security monthly check is $1,268 of which about $350 goes to out-of-pocket medical expenses not covered by Medicare. Twenty-five percent of Social Security beneficiaries have no income other than their monthly check. Sixty-six percent depend on Social Security for most of their monthly income.
Given the rapid future growth of our elderly population, the question is, can we afford to continue being so generous with the elderly? Is it time to turn back the clock?
This is where the quality of the budget debate in Washington really starts to fall apart. Many people say that we should attack entitlement programs in general while protecting retirement benefits. But there’s simply very little in non-discretionary spending to cut besides retirement benefits. Apart from the 71 percent of non-discretionary funds going for Social Security, Medicare and Medicaid, 12 percent is dedicated to federal military and civilian retirement and veteran pensions accounts. Interest on the national debt accounts for another 10 percent, leaving only 7 percent for dozens of other non-retirement related entitlements. What’s more, the Congressional Budget Office projects that outlays for that set of programs is already likely to shrink in real per capita terms over the coming decade.
Others imply that they would address the growth in benefits for seniors but argue in the same breath that we should protect Social Security benefits. The most prominent example of this approach is the Medicare “reform” package produced by House Budget Committee Chairman, Paul Ryan (R-WIS). He first inserted that package in the 2012 Budget Resolution which was adopted by the Republican-controlled House of Representatives.
The Ryan plan did cut back long term outlays under Medicare health insurance for seniors, but it did so at a heavy price to beneficiaries. CBO estimated that the portion of health expenses that a 65 year old would have to cover out of pocket under the Ryan proposal would jump from 35 percent today to more than 61 percent during the first year of the Ryan plan. Expressed in dollar terms, that would reduce the money left from the average Social Security check to meet expenses other than health care from more than $900 today to less than $550 during the first year of the Ryan plan. I don’t believe the majority of Americans will go down Rep. Ryan’s road and it is not because soft hearted, free spending liberals will stop them. It is not about Washington. A Pew Research Center poll last year found that by wide majorities Americans of all age groups believe that government does too little to help the elderly; fewer than 7 percent in any age group said it did too much.
So what can the nation do about a projected imbalance between expenditures and revenues that may push the publicly held debt -- now a staggering $11.9 trillion or 75 percent of GDP -- to more than 100 percent of GDP in the coming decades? The answer is simple. Cut the expenditures that can be cut and raise taxes to pay for the rest. Recent projections indicate that because of the growth of our elderly population, government spending will increase to about 25 percent of GDP by the time all of the baby boomers have hit 65. We can and should attack wasteful or inappropriate spending like the high prices we pay for drugs under the Medicare program. But in the end all of those savings are not going to significantly alter the long term trajectory of the budget. In the end we will need more revenue.
That leads us to perhaps the biggest piece of misinformation that has been injected into the budget debate in recent decades: the proposition that raising taxes will be devastating to the nation’s economic future. There is absolutely no evidence for this either in the history of our own tax policy or the history of other developed countries—particularly when you are talking about a relatively small adjustment that would be needed to solve this particular problem.
We could gradually increase taxes over the next decade so that each increase would account for only a small fraction of yearly per capita income growth. That would allow us to increase total federal tax collection from the projected 20 percent of GDO to around 24 percent, leaving us as one of the lowest taxed countries in the developed world. But our seniors would continue to have the essentials necessary for a dignified retirement and our public debt would fall from the current 74 percent of GDP to less than 58 percent by the end of the next decade.
Compared to the problems this country faced when the baby boom generation began arriving, the current problem seems almost trivial. In 1946 after World War II, we were faced with discharging 10 million members of armed forces (equal to about 25 percent of the labor force at that time) and reintegrating them into an economy which was heavily dependent on a single industry – weapons production -- that would largely go away. Simultaneously, we had to deal with a public debt that had snowballed to 110 percent of GDP--nearly 50 percent bigger as a share of GDP than the debt we have today.
It is not that our problem is so great; it is that our ability to work toward practical solutions seems to have been greatly diminished. If we can’t come together and solve this problem it will be a clear signal that we face a much bigger problem than the nation’s budget—we will need to grapple with the fact that we can no longer effectively govern ourselves as a people.
Scott Lilly is a Senior Fellow at the Center for American Progress and a former Democratic staff director of the House Appropriations Committee. This analysis is based on a recent CAP study prepared by Lilly.