Morning Bell: Move Forward, Not Back, on Entitlement Reform

Conn Carroll /

Last week, after the Congressional Budget Office report showed that the pre-stimulus budget deficit would reach $1.2 trillion in FY 2009, President-elect Barack Obama reiterated his campaign promise to make Social Security and Medicare reform a “central part” of his efforts to control skyrocketing federal spending. Democrats on the Hill are already pushing back against any reform that would lower government spending, but Obama is correct. Spending is the problem. In the coming decades, the cost of Social Security, Medicare, and Medicaid will leap from 8.4 percent to 18.6 percent of gross domestic product (GDP)–an increase of 10.2 percent. Funding all of the prom­ised benefits with income taxes would require rais­ing the 35 percent income tax bracket to at least 77 percent and raising the 25 percent tax bracket to at least 55 percent. As Obama said at the October 30, 2007 Democratic presidential debate:

We’ve got 78 million baby boomers who are going to be retiring over the next couple of decades. That means more retirees, fewer workers to support those retirees. It is common sense that we are going to have to do something about it. That is not a Republican talking point. And if we don’t deal with it now, it will get harder to deal with later.

Under the current system, retirees will spend one-third of their adult lives in taxpayer-funded retirement while national security, education, health research, and antipoverty programs fight for the few remain­ing tax dollars and low taxes are threatened. To fix this problem Obama should:

Disclose the government’s long-term obligations: Though Social Security and Medicare currently comprise about one-third of the entire federal budget, Congress is not required to pass an annual budget for either program. Rather, both operate on autopilot under formulas contained in their governing laws. Obama should push for two key changes in the budget process: 1) Ensure that the long-term costs of entitlement programs are built into the budget process and considered along with other priorities; 2) Any changes in entitlement programs should also be measured over the long term.

Create a commission to submit recommendations to Congress for a vote: Senate Budget Committee Chairman Kent Conrad (D-ND) and ranking Republican Senator Judd Gregg (R-NH) have introduced legislation in the Senate, and Reps. Frank Wolf (R-VA) and Jim Cooper (D-TN) have introduced legislation in the House that would create a bipartisan commission intended to address the “unsustainable imbalance” between federal commitments and revenues while increasing national savings and making the budget process give greater emphasis to long-term fiscal issues. This commission would hold public hearings around the country to discuss the long-term fiscal problem, and its recommendations should receive “fast-track” consideration by Congress.

Create incentives for savings: Obama has spoken positively of “automatic IRAs” for American employees not covered by employer-sponsored retirement plans. Auto-IRAs are a terrific way to increase savings and thus empower Americans to build their own retirement savings. Lowering tax rates on savings would also help Americans to build wealth.

Do not increase taxes: During the presidential campaign, Obama floated the idea of reforming Social Security by assessing a payroll tax of 2 to 4 percentage points on those who earn over $250,000 annually. President Bill Clinton rejected this idea in the 1990s, and Obama should as well. America cannot tax its way out of this entitlement challenge. The problem is caused by surging spending levels, not declining revenues–in fact, taxes as a percentage of the economy are already projected to rise to record levels over the next few decades.

Reform Social Security: Social Security spending is pro­jected to increase from its current 4.3 percent of GDP to 6.1 percent by 2050–an increase of 1.8 percent. Obama should: 1) raise the retirement age gradually until it reaches 70; 2) income-adjust benefits to target needy seniors more effectively; 3) align Social Security’s inflation adjustment with a more accurate price index than the consumer price index.

Reform Medicare: Medicare costs are projected to more than triple from today’s 2.7 percent of GDP to 9.4 percent by 2050. Obama should: 1) reduce the massive Part Band Part D subsidies for upper-income families; 2) bring more choice and competition to health care by making Medicare a defined-contribution system.

Reform Medicaid: Federal Medicaid spending is pro­jected to jump from 1.4 percent of GDP to 3.1 per­cent by 2050. Because Washington reimburses states for 57 percent of all costs, every dollar that a state spends on Medicaid guarantees an additional $1.33 grant from Washington. Converting Medicaid into a block grant to states would eliminate state incentives to overspend on Medicaid.

One of the first bill’s Obama will sign after being inaugurated on January 20th will probably be a major expansion of Medicaid spending, adding a minimum of $33 billion in new federal spending over just the first four years. This will be a major step backwards on Obama’s promise to reign in entitlement spending. We sincerely hope he eventually changes course and tries fixing the entitlement problem instead of making it worse.

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