Opinion

The coming entitlement tsunami

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Michael Tanner
Senior Fellow, Cato Institute
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      Michael Tanner

      Michael Tanner heads research into a variety of domestic policies with a particular emphasis on health care reform, social welfare policy, and Social Security. His most recent book, Leviathan on the Right: How Big-Government Conservatism Brought Down the Republican Revolution (2007), chronicles the demise of the Republican party as it has shifted away from its limited government roots and warns that reform is necessary to avoid continual electoral defeat.

      Under Tanner's direction, Cato launched the Project on Social Security Choice, which is widely considered the leading impetus for transforming the soon-to-be-bankrupt system into a private savings program. Time Magazine calls Tanner, "one of the architects of the private accounts movement," and Congressional Quarterly named him one of the nation's five most influential experts on Social Security.

      His other books include, Healthy Competition: What's Holding Back Health Care and How to Free It (Second Edition, 2007), The Poverty of Welfare: Helping Others in Civil Society (2003), and A New Deal for Social Security (1998). Tanner's writings have appeared in nearly every major American newspaper, including the New York Times, Washington Post, Los Angeles Times, Wall Street Journal, and USA Today. A prolific writer and frequent guest lecturer, Tanner appears regularly on network and cable news programs. Before joining Cato in 1993, Tanner served as director of research of the Georgia Public Policy Foundation and as legislative director for the American Legislative Exchange Council.

Now that we’ve finished creating a new $1 trillion health care entitlement program, Washington has suddenly discovered that we are facing a crisis with—surprise—entitlement programs.

No one should be shocked to learn that government spending is out of control. In fact, last year, federal spending topped 24.7 percent of gross domestic product last year, the highest peacetime percentage in U.S. history. That compares to an historical average of roughly 21 percent. Meanwhile, federal taxes have traditionally run at around 18 percent of GDP. (Currently, they are down around 16 percent as the economic downturn—though that lower percentage has predictably become fodder for those looking for any excuse to ratchet up tax rates and depress the economy further). Thus, our current budget deficits.

Even President Obama has recognized the problem. Well, sort of: after presiding over an orgy of federal spending that could even put George W. Bush to shame, he has promised to freeze discretionary, non-defense spending…next year.

But our current budget squall is nothing compared to the tsunami to come. And the big wave has almost nothing to do with the 12 percent of the budget that Obama may or may not freeze after the next election. Our major entitlement programs, Social Security, Medicare and Medicaid, are all careening toward insolvency.

Social Security faces unfunded liabilities of more than $15.8 trillion. And while that sounds like a lot of money, it is dwarfed by Medicare’s looming budget shortfall of between $50 and $100 trillion, depending on which accounting measure is used. Because of its funding mechanisms, Medicaid does face the same type of accounting shortfalls, but it will soon add hundreds of billions of dollars to federal, not to mention state, spending.

As the full force of entitlement programs kicks in, the federal government will consume more than 40 percent of GDP by the middle of the century. Half of that will be taken up by just those three entitlement programs. From there, it only gets worse.

Faced with this rising tide of red ink, the traditional response in Washington is that we must have the “courage” to raise taxes. But think about how much taxes would actually have to be raised to pay for all the government spending to come. And it’s not just the “rich” who would get soaked. In fact, if you confiscated the wealth of every person in the United States earning over $1 million per year, you would barely make a dent in our future obligations.

If we really wanted to pay for the amount of spending to come, we would have to raise both the corporate tax rate and top income tax rate from their current 35 percent to 88 percent, the current 25 percent tax rate for middle-income workers to 63 percent, and the 10 percent tax bracket for low-income workers to 25 percent.

In theory that would eliminate the deficit, but as a society we would be much poorer. After all, every dollar that government spends is a dollar that is siphoned off from American workers regardless of whether it is raised through debt or taxes. Both divert money from more efficient uses in the private sector to less-productive uses in the public sector. Both mean fewer jobs and less economic growth.

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  • chamby

    First off, how can you claim that this is “the highest peacetime percentage in U.S. history”? Have you forgotten that we are still at war and have been for the majority of the last decade? One change that is welcome from this administration is that they are accounting for our war costs in their federal budget, rather than keeping those costs “off the books” in passing supplemental bills to fund the efforts.

    That being said, both parties have been spending like there is no tomorrow. The Democrats prefer to pay for the entitlements with a tax-and-spend approach, while the Republicans are happy to bring entitlements home to their constituents while passing the buck to the next generation by a borrow-and-spend approach.

    I would really like to see less lawyers in Congress and replace them with more economists or MBAs so we can have someone with some financial knowledge come up with a plan to unwind Social Security and Medicare. The current crop of politicians has no problem raiding the funds and pretending they will find money at some point down the road. This has to stop.

    Perhaps term limits would be a way to be certain that our representatives are working for the good of their constituents, rather than for the good of their re-election war chests.

  • wte9

    1. Labeling health care a $1 trillion entitlement is generous in the extreme to administration. It will be far more.
    2. You write that we’ll have to raise the corporate and income tax. Apparently not, it seems the administration is prepared to call and raise you with a VAT.
    3. This is another in a long list of conservative columns that simply point out obvious facts and do nothing to change what needs changing. If you’ve noticed, the left seems to actually go out and you know, pass things they like. The right not so much. Tell me who to donate too. Tell me who to vote for. I might not agree, but it’s better than just bemoaning this fiscal death spiral in an op-ed.

  • http://www.facebook.com/people/Terry-Smith/100000041488093 Terry Smith

    An excellent and accurate column. I’ve paid taxes for 32 years since my first job at 14. I believe in them and believe they should be raised periodically. What I don’t believe is raising them to pay for reckless spending. I no more believe politicians will control their spending with increases in taxes and/or a new VAT, than I believe there’s gold at the end of the rainbow. Simply put, I don’t trust politicians to control spending. They won’t do it. Hence, I won’t give them more money.

    That said, I would pay more if I, as a voter/taxpayer, could directly vote on spending limits since congress won’t do it. With the internet and even snail mail, direct voting – aka democracy – is a very real possibility. Perhaps we could set up something that gave Americans 1/3 of the voting power in the House and Senate.

    To beat a dead horse, no new taxes. Politicians will just spend more. That is an indisputable fact. I challenge anyone to disprove.

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