Entitlement Spending: the Problem the Debt Deal Won't Fix

It's easy when focusing on the play-by-play of the Washington mud-wrestling match over the debt ceiling to lose sight of the critical role of entitlement spending in determining the nation's fiscal and economic health for decades to come. A recent column in the Washington Post by Robert Samuelson is a reminder of just what's at stake and how critical it is to find a lasting solution to the mismatch between what programs like Social Security and Medicare take in and what they pay out - assuming they remain solvent and continue to meet their obligations.

Here's how Samuelson frames the issue:

"...Social Security, Medicare, Medicaid and other retiree programs constitute roughly half of non-interest federal spending. These transfers have become so huge that, unless checked, they will sabotage America's future. The facts are known: By 2035, the 65-and-over population will nearly double, and health costs remain uncontrolled; the combination automatically expands federal spending (as a share of the economy) by about one-third from 2005 levels. This tidal wave of spending means one or all of the following: (a) much higher taxes; (b) the gutting of other government services, from the Weather Service to medical research; (c) a partial and dangerous disarmament; (d) large and unstable deficits."
Samuelson goes on to point out that many retired people, contrary to popular belief, are not struggling to make ends meet and are living quite comfortably. He then proposes some form of means-testing for benefits:

"Our politicians make perfunctory bows to entitlement reform and consider that they've discharged their duty, even if nothing changes. We need to recognize that federal retiree programs often represent middle-class welfare. Past taxes were never 'saved' to pay future benefits. We need to ask the hard questions: Who deserves help and who doesn't?"
(Those questions don't seem to have been addressed significantly in the deal announced Sunday to raise the debt ceiling and reduce deficits. Early reports suggest that it contains little in the way of entitlement spending reform.)

Republicans will argue that contributions made to Social Security and Medicare were intended for, and even promised to, each citizen, much like contributions to 401(k) plans or private insurance. Samuelson points out, however, that the connection between an individual's payments into these programs and the benefits received has always been tenuous.

Click through to the next page for some modest proposals to bring entitlement spending under control. Either way, circumstances have changed; people are living longer than ever, and medical costs, even removing from consideration the waste and inefficiency that plague the health care system, are soaring. That means that the bargain between citizens and the government has to change too. The argument isn't liberal or conservative; it's actuarial.

Democrats no doubt will call for higher Social Security and Medicare taxes. Republicans will counter that the government hasn't done a masterful job with all the money that has been funneled into the Treasury for all these years - let's bring the waste and inefficiency that plague the health care system back into consideration - and that giving the apparatchiks even more money to play with isn't the answer.

How about these - one or the other or both - for possible solutions:

Let reality trump politics and raise the retirement age to 68 at a rate of two months per year, starting in five years or so to give people time to prepare. So anyone who is 60 today will still be able to collect Social Security and Medicare benefits at 65, but those who turn 60 in 2012 won't be eligible until they are 65 years and two months; if they turn 60 in 2013, then their retirement age will be 65 years and four months, and so on.

The average 65-year-old American is expected to live to 84, according to the Social Security Administration. Three years less of benefits for each retiree and three years more of contributions could produce a favorable long-term shift of 25 percent or so in the gap between contributions received and benefits paid out.

The other idea is to phase in taxation of Medicare benefits received by retirees with taxable income, from sources other than Social Security, starting at $50,000. The tax revenue will help Medicare balance it books. Perhaps just as important, the tax liability will provide an incentive to Medicare recipients to shop around and use the system more wisely.

If these ideas aren't to your liking, or to Congress's, there must be others that are feasible. As Samuelson notes, a reason we're in this fix is not a shortage of choices but a shortage of the will to implement any:

"Because Social Security and Medicare are so intertwined in our social fabric, changing them could never be easy. But the fact that we've evaded the choices for so long is why the present budget impasse has been so tortuous and why, if we continue our avoidance, there will be others."