"We have a problem, and the problem is America is getting older and that there are fewer people to pay into the system to support a baby boomer generation which is about to retire. Therefore, the question is, does this country have the will to address the problem?"
-- President Bush, Dec. 9, 2004
The answer seems to be "no," starting with the president. Language matters. How we discuss something -- the words and phrases we select -- determines whether what we say makes sense. The fact that both Bush and his opponents have chosen to debate only Social Security, highlighted by the president's "personal accounts" proposal, betrays a lack of seriousness that promises failure. The nation's problem is not Social Security. It is all federal programs for retirees, of which Social Security is a shrinking part. Admit that and the debate becomes harder, but it also becomes more honest and meaningful.
Our national government is increasingly a transfer mechanism from younger workers (i.e. taxpayers) to older retirees. In fiscal 2004 Social Security ($488 billion), Medicare ($300 billion) and Medicaid ($176 billion) represented 42 percent of federal outlays. Excluding spending that doesn't go to the elderly, the Congressional Budget Office crudely estimates that these programs pay an average of almost $17,800 to each American 65 and over. By 2030 the number of elderly is projected to double; the costs will skyrocket.
It makes no sense to separate Social Security from Medicare. Most Social Security retirees receive Medicare. Similarly, it is the total cost of these programs that matters for the budget, taxpayers and the economy. By itself, Social Security is almost irrelevant. Indeed, the big increases in future spending occur in health care. The actuaries of Social Security and Medicare project that Medicare's costs will exceed Social Security's in 2024 -- and then the gap only widens. (The projections don't include Medicaid, which pays for some nursing home care. Including Medicaid would widen the gap further.)
Look at the numbers. From 2004 to 2030, the combined spending on Social Security and Medicare is expected to rise from 7 percent of national income (gross domestic product) to 13 percent. Two-thirds of the increase occurs in Medicare. To add perspective: The increases in Social Security and Medicare represent almost a third of today's budget, which is 20 percent of GDP. Covering promised benefits would ultimately require a tax increase of about 30 percent; that assumes today's budget is balanced (dispensing with the issue of Bush's tax cuts). In current dollars, the needed tax increase would be about $700 billion annually.
The central budget issue of our time is how much younger taxpayers should be forced to support older retirees -- and both political parties and the public refuse to face it. What's fair to workers and retirees? How much of a tax increase (never mind budget deficits) could the economy stand before growth suffered badly? How much do today's programs provide a safety net for the dependent elderly, and how much do they subsidize the leisure of the fit or well-to-do? (About 15 percent of elderly households have incomes exceeding $75,000.) How long should people work?
We need a new generational compact to reflect new realities. In 1935, when Congress passed Social Security, life expectancy at birth was 62; now it's 77. In 1965, when Congress passed Medicare, the 65-and-over population was 9 percent of the total; by 2030, it's expected to be 20 percent. The generational compact includes Social Security, Medicare and Medicaid. If this year's debate focuses only on Social Security, it will be an exercise in deception. Unfortunately, both the White House and congressional Democrats have a stake in that deception.
Democrats argue that "the Social Security problem" can be fixed with tolerable tax increases and benefit cuts, imposed mostly on the upper middle class and the rich. True. The long-term gap between promised benefits and present taxes equals 1 to 2 percent of GDP. Though large, the needed changes in taxes and benefits probably wouldn't be crippling. There's no "crisis," say Democrats and supporting pundits. What they omit is Medicare. Adding that, tax increases would be huge -- and hard to limit to the wealthy.
The focus on Social Security also suits the White House. For starters, it avoids the reality that until now many Bush policies have favored the old over the young. In 2030 the new drug benefit raises Medicare spending by an estimated 36 percent. The tax cut on dividends and capital gains (to 15 percent) benefits the old -- particularly the wealthy elderly -- because they own a disproportionate share of stocks. Elderly households with incomes exceeding $100,000 will receive 27 percent of the benefits of these cuts (worth about $6 billion) in 2005, estimates the Tax Policy Center. As for personal accounts, they would involve immense practical problems. Why run the risks if, because Medicare has been ignored, the real problem of federal retirement spending remains largely unaddressed? Good question. The White House isn't asking.
What's discouraging is that, along with most Republicans and Democrats, many "experts" and pundits also evade the hard questions. Their purpose is mainly to condemn or cheer George Bush. The debate we need involves generational responsibility and obligation. Anyone who examines the outlook must conclude that, even allowing for uncertainties, both Social Security and Medicare benefits will have to be cut. We can either make future cuts now, with warnings to beneficiaries, or we can wait for budgetary pressures to force abrupt cuts later, with little warning. That's the problem, and to answer Bush, no one wants to address it.