The coming entitlement tsunami

Michael Tanner Senior Fellow, Cato Institute
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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.

More importantly, we should remember that every dollar the government spends is one less dollar that you can spend on food, clothing, housing, charitable contributions, or other goods and services of their choosing. It is, after all, your money.

What’s missing in Washington is not the courage to raise taxes, but the courage to cut spending. Unfortunately, that type of courage truly remains lacking—on a bipartisan basis.

Recently, Rep Paul Ryan (R-Wisc.)—one of the youngest members of Congress at age 40, but seemingly one of the few adults left in Washington—put forward a comprehensive proposal to reform entitlement programs and bring government spending back down to historical levels. His plan attracted fewer than a dozen co-sponsors. No one from the Republican leadership backed it; they were too busy complaining that the Democratic health care bill cut Medicare. (It actually won’t, unfortunately.)

And the Democrats? Their latest contribution has been the aforementioned health care bill, with its unprecedented level of budget chicanery to hide its true costs.

It has long been a truism that “if something cannot go on, it will eventually stop.” In Washington these days, Congress seems determined to prove that wrong.

Michael D. Tanner is a Cato Institute senior fellow and author ofLeviathan on the Right: How Big-Government Conservativism Brought Down the Republican Revolution.”