The footsteps of an aging America are hard to ignore, especially with daily alarms ringing over the federal government's debt and deficit. The leading edge of the baby boom generation is reaching its retirement years and at the core of the long-term fiscal challenge lie the three main entitlement programs, Social Security, Medicare, and Medicaid. (The other main spending items weighing on the fiscal ledger are defense and interest on the debt.) Spending on entitlements is growing faster than the economy and revenues.
"This debt is like a cancer," said Erskine Bowles, co-chair of President Obama's bipartisan panel on deficit reduction, at the annual meeting of the National Governors Assn. on July 11.
Little wonder Americans seem gripped with dread about an aging society. And there are no magic elixirs or fiscal wands that will painlessly put the federal government's fiscal house in order. It will take political compromise to do that, a classic mix of higher taxes and reduced benefits to accomplish the deficit-and-debt reduction task.
That said, there is a fiscal carve-out maneuver that would greatly ease the job. Most commentary assumes that socialsecuritymedicaremedicaid is one word. Yes, they're all entitlement programs, yet the bulk of the long-term budget pressure comes from higher health-care spending. For instance, the benchmark 75-year projection by the Social Security Trustees guesstimates the cost of Medicare alone will swell to 11.4 percent of gross domestic product in 2083—94 percent larger than Social Security's cost.
Fact is, there is no Social Security crisis. The system isn't broke. There's financial trouble down the road but it's manageable. Yet the title of the House Ways & Means subcommittee on Social Security hearing on July 15 got to the essence of the matter: Social Security at 75 Years: More Necessary Now Than Ever. So, separate Social Security from the rest of the entitlement fight and deal with it on its own merits. "The health-care problem is hard," says David Cutler, economist at Harvard University and senior health-care adviser to the Obama Presidential campaign. "Social Security isn't."
For one thing, it's important to remember that economic growth alone can't solve the long-term budget deficit and debt overhang, but a healthy economy will address at least some, if not all, of the projected Social Security shortfall. For instance, a critical assumption in the long-term projection of a Social Security shortfall is based on average annual productivity growth of 1.7 percent after 2018. The far more optimistic long-term scenario has productivity growth averaging 2.0 percent after 2019 and, with increased productivity boosting wages, the shortfall is put off well into the future. (The low-cost scenario assumes a number of other economic factors such as higher immigration than the baseline intermediate scenario forecast, but productivity growth is critical to the outlook.)
To be sure, rising wages pump up benefits as well as revenues over time. And while economists know that boosting productivity involves a mix of improving education and worker skill, investing in knowledge and innovation, encouraging entrepreneurship and a sound infrastructure, there's a great deal of uncertainty surrounding the impact of the policy mix, let alone the timing. So, prudence dictates shoring up the fiscal soundness of the system through a modest mix of changes, such as raising the retirement age and doubling the cap on annual wages subject to the payroll tax. (The Congressional Budget Office offers a list of options in its July 2010 report, Social Security Policy Options.)
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