Federal “Entitlements” Must Be Slashed

Unless Congress steadfastly resists clamoring interest groups and sharply cuts federal spending, America’s economic prospects will darken. Under current tax and entitlement laws, a looming fiscal crisis threatens the economic and physical well-being of millions of Americans.

In this battle, Bill Clinton has already surrendered. The President’s proposed budget for fiscal 1996 calls for a spending increase of nearly 5 percent and foresees a greater deficit, almost $200 billion. A White House official says, “People don’t care about deficit reduction. We did that in the first two years. Look where it got us. We lost the House and the Senate.”

Clinton intends to let the GOP take the heat for cutting spending. Will the Republicans play political patsy? Maybe so, but when they come to the hard choices, their courage may falter and their yen for reelection assert itself. Early in the budget process, Republicans are showing little enthusiasm for chopping such inexcusable items as pork-barrel defense projects and subsidies to wealthy farmers.

If Congress lacks the courage to make the easy cuts, it certainly will quail when it considers Social Security, Medicare, and Medicaid. But unless these programs are curtailed, cutting the rest of the budget scarcely helps. These three programs alone currently account for 70 percent of all federal entitlement outlays—38 percent of all federal outlays—and they are growing rapidly. In the President’s budget, they increase by $90 billion in the next two years. Just the increase in spending for the Big Three entitlements between 1995 and 1997 will equal the amount currently being spent for international affairs, agriculture, transportation, and justice combined.

The aging of the population will intensify this trend. As baby boomers begin to qualify for pensions after 2007 and the growing proportion of the elderly in the population magnifies the demand for health care, spending on the Big Three programs will accelerate.

According to the Bipartisan Commission on Entitlement and Tax Reform, the Medicare Trust Fund will be insolvent by 2001. Even if health care costs rise no faster than the gross domestic product (GDP) after 1999, outlays for Medicare and Medicaid will increase from 3.3 percent of GDP in 1993 to 7.2 percent in 2030.

The Commission’s projections also show that by 2013 Social Security benefit payments will exceed revenues, and the Trust Fund will be depleted by 2029. So Social Security will go broke within 10 years of the earliest retirements by the biggest cohort of baby boomers, those born in 1957.

The demographic changes driving these disastrous trends are plainly visible—there is no denying them. Unless Congress alters current policies, a fiscal fiasco will surely occur. What might Congress do?

Social Security taxes could be raised, but taxing earnings more heavily discourages employment by driving a bigger wedge between the employer’s cost of employment and the employee’s take-home earnings. Persistently high unemployment in Europe, due in part to high employment taxes, serves as a lesson. Slowing the growth of employment will only increase the shortfalls of Social Security and Medicare revenue.

Borrowing might fill the gap. But federal borrowing already absorbs two-thirds of the private savings in the United States, leaving only 1.7 percent of GDP available as net private savings. Unless Americans save more to invest in new private capital, our productivity and standard of living will stagnate. We cannot continue to rely on foreigners to augment our investment funds, as the government’s increasingly precarious fiscal condition will lead foreigners to fear Uncle Sam’s resort to inflating the money stock, which would drive prices up and the exchange rate down.

As discussed in the new Independent Institute book, Beyond Politics, only one genuine solution presents itself: entitlement commitments must be cut drastically. The federal government has promised more than it can deliver, and trying to fulfill its extravagant promises leads to economic ruin.

The American Association of Retired Persons, the most powerful lobby in Washington, does not want to face this reality. According to a top AARP lobbyist, “Protecting Medicare and keeping Social Security out of this debate are the No. 1 priority.” Mindful of the legions of elderly voters, few politicians want to take responsibility for the necessary cutbacks.

Last fall, voters rejected not a deficit-reducing party but one whose health care and other proposals precluded any possible reductions in the burdens from government. Unless the new Congressional leaders fulfill their promises to make hard choices, they will likely join their Democratic predecessors in defeat, as indeed they should. They must face reality and slash the existing commitments to Social Security, Medicare, and Medicaid.