First to Tackle Entitlement Reform Wins
In current budget cap negotiations, Republicans want to avoid the debt ceiling to prevent $71 billion in defense spending cuts, and Democrats are especially concerned about potentially losing $55 billion in domestic spending. Both parties want to avoid spending cuts to areas most important to their voter bases, but they want to minimize money going to the other party’s favored programs.
Taking a step back from the budget cap talks illuminates the bigger picture of America’s fiscal woes––Washington spends twice as much money on mandatory entitlement programs than it does on the rest of its budget combined, a ratio expected to rise dramatically in coming years. Yet this tug of war around the budget caps doesn’t consider entitlement spending. The payoff of designing more sustainable entitlement policies is so great that it could transform what policies the left and right can reasonably propose––all while protecting the futures of Americans dependent on these federal programs.
As the Congressional Budget Office wrote following a Senate hearing, discretionary spending––like defense and homeland security, health, and education––has been falling relative to the size of the economy over the last fifty years. In 1969, 12 percent of GDP was spent on federal discretionary spending, and this year, it is half that share at 6.3 percent of GDP.
Meanwhile, mandatory spending, which includes entitlement programs like Social Security, Medicare, and Medicaid, has experienced nearly the opposite trend. Entitlements jumped from costing 5.5 percent of GDP in 1969 to 12.7 percent this year. In ten years at current rates, the U.S. will spend three times as much on entitlements than the rest of its budget combined.
Mandatory spending is rising so rapidly that even if Congress froze all discretionary spending at current amounts for the next thirty years, which would shrink discretionary programs from being about a third of the federal budget to about a tenth, debt would still skyrocket to over 90 percent of GDP.
In other words, so long as Congress’ budget talks only focus on discretionary spending, they cannot direct America down a more fiscally sustainable path. Federal entitlement programs must be reformed into more self-sustaining systems.
Even outside of today’s budget cap concerns, Congress has to address out-of-control mandatory spending eventually. This year’s trustee reports for major entitlement programs show that funds will deplete sooner rather than later without alternative funding sources.
Medicare’s “Part A” can operate at capacity only for another seven years. For all Medicare recipients to receive their payments for just another two years, all taxpayers would have to pay an average of 25 percent more in Medicare payroll taxes over the next ten years. To cover expenses for Parts B and D of Medicare, Congress would have to raise premiums by an annual average of $4,200 and $2,000, respectively.
Due to the rising retiree per worker ratio, Social Security will become insolvent in just 16 years, after which all beneficiaries will face a 20 percent cut in benefits. Workers younger than 51 years old today would never see a year that gave them the full retirement benefits they were promised. Overcoming unfunded liabilities here will only become costlier with time, and if the economy were to stop humming so smoothly, disability insurance applications would rise and further burden the system.
Congress has put little energy into entitlement reform, but that doesn’t mean there is a shortage of reform ideas. For instance, healthcare entitlements can be lowered by basing payments to providers on outcomes rather than inputs, and Medicare and Medicaid can expand alternative payment methods (APMs). Effective bipartisan Social Security solutions include reflecting modern demographics, namely longer life spans and growing income inequality, and it needs to calculate the impact of inflation better. A slight payroll tax increase can pay huge dividends.
If Democrats or Republicans could settle on an entitlement reform package that addresses the most significant causes of America’s financial strain, not only would they make programs many citizens rely on more sustainable, but more political options could become available to them. For the left, proposals for things like green infrastructure or student loan forgiveness become more powerful if mandatory spending doesn’t have to dwarf the discretionary programs that handle tomorrow’s problems. Right-wingers interested in military modernization or keeping taxes down also have more room to work with.
In many respects, these policy ideas are mutually exclusive and will require deliberation. But the legislators who steer entitlement programs back to self-sufficient will also control the national discussion around what the U.S. can and should afford, taking away what usually is their opponents’ first line of defense. Entitlement reform is profitable both financially and, in the long run, politically.
This blog post originally was written on June 23, 2019.