To leaders of both parties, offending today’s voters with unpopular solutions to future problems makes no sense. Indeed, Republicans and Democrats will gladly worsen tomorrow’s problems to win more of today’s votes. President George W. Bush did precisely that in successfully advocating a new Medicare drug benefit, and although Democrats criticized him, their complaint was that the new benefit isn’t generous–a.k.a., expensive–enough.
It’s plenty expensive anyway. The spending is usually described as $400 billion over the next decade, but the CBO report says that when the drug benefit is fully phased in, it will cost about 1 percent of gross domestic product annually by 2030. That’s about $110 billion in today’s dollars, and these costs will simply increase total spending for Social Security, Medicare and Medicaid (Medicare provides basic health insurance for the elderly; Medicaid covers some nursing-home care).
Now, let’s examine the overall numbers. In 2002 total federal spending (except interest on the debt) was 17.8 percent of GDP. Under one CBO projection, that increases almost two fifths, to 24.5 percent of GDP, by 2030. Another projection shows an increase of only a sixth, to 20.8 percent of GDP. The main difference between the two projections involves assumptions about higher health costs, but unfortunately, both projections may be optimistic. Why? Well, the CBO offsets some of the higher spending for the elderly by assuming modest reductions in other federal spending as a share of GDP from 2002 levels.
Under both projections, defense spending declines to its lowest GDP share since 1940. And then there’s the rest of government: homeland security, national parks, health research, school aid, highways, food stamps, meat inspections–and much more. This spending also drops as a share of GDP. If you assume these cutbacks don’t occur spontaneously, then federal spending in 2030 could be higher than the projections–and they don’t include interest on the debt (about 1.5 percent of GDP in 2003) or allow for big emergencies. Suppose China decides to militarize space. How much would a U.S. response cost? Or what if there’s an epidemic that dwarfs AIDS?
All projections involve huge uncertainties, but federal spending is clearly moving toward a higher plateau. Immense tax increases would be needed to pay for this spending. In the past 30 years, federal taxes have averaged 18.4 percent of GDP, slightly higher than they are today. Raising taxes from this level to, say, 24 percent of GDP involves an increase of almost a third, amounting to $600 billion a year in today’s dollars. How well would the economy fare with much higher taxes? No one knows. But choices inevitably will be made. If spending–on the elderly or everything else–isn’t cut or taxes raised, deficits will spin out of control.
What’s astonishing is that the problem has been known for decades. A prudent society would have prepared by adjusting federal retirement programs to emerging social and economic realities. People can pay for their own retirements through savings and, possibly, part-time work, or they can rely on others, mainly workers and taxpayers, to pay through government programs. As life expectancy and healthiness improved, the obvious response was to begin gradually–with much advanced warning–raising eligibility ages and tying benefits more to income. This would have encouraged saving and tempered future increases in federal spending.
Little was done. Political leaders of the “greatest generation’’ ignored the future, and now their baby-boomer successors–led by Presidents Clinton and Bush–are doing the same. But not all blame belongs with leaders. In a new book, “Who Will Pay?” economist Peter Heller of the International Monetary Fund observes that average citizens have been enablers of the politics of denial. No less than their leaders, they’re shortsighted, he argues. Or perhaps just selfish.
The longer choices are postponed, the harder they become–and they’ve already been delayed so long that they can’t be easy. Prospective baby-boom retirees may assume that their children will always pay the costs of federal retirement programs. This may be an illusion. As Heller notes, one possible response to a future budget crisis would be for government to “abandon or suddenly scale back on their commitments” to retirees. Abrupt benefit cuts would be arbitrary and unfair. But given baby boomers’ role in sanctioning today’s indifference and denial, they would be richly deserved.
