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By Stephen M. Lilienthal
July 27, 2006
In the midst of good economic news an ominous cloud looms in the “Fiscal Year 2007 Mid-Session Review: Budget of the United States,” released by the Office of Management and Budget (OMB). Will it continue casting a dark shadow over the economic future of Americans, particularly our young? Recent statements hint our country’s citizens can expect determined leadership from the White House in addressing the problem of mounting obligations from entitlement programs.
OMB announced last week that economic growth generated an unexpected increase in tax receipts. The Bush Administration is predicting the deficit can be halved by FY 2008 to $188 billion, a significant decrease from the FY 2004 level of $521 billion. The OMB analysis noted that the growth rate over the last few years was even more impressive given that it coincided with our fighting the Global War on Terror, recovery from several highly destructive hurricanes and rising energy prices. “The projected economic growth is expected to remain strong throughout 2006 and into 2007,” the report stated, adding it would “moderate only slightly” during 2008-2011.
There remains the looming cloud of mandated spending. Rob Portman, OMB Director, remarked, while announcing the good news, that our country could not afford to ignore the mounting liabilities amassed by Social Security, Medicare and Medicaid. “That is not a problem that is being resolved by the good news that I’m reporting today,” admitted Portman. The Mid-Session Review warns:
“As currently structured entitlement spending in Social Security, Medicare, and Medicaid is growing faster than the economy and the nation’s ability to pay for this spending. No plausible amount of cuts to discretionary programs or tax increases can avert this major fiscal challenge. Entitlement or mandatory spending plus net interest expenses comprise 62 percent of the budget. Within the next thirty years, entitlements and interest on the public debt will exceed all available tax revenue, even without spending on education, defense, and homeland security.”
President Bush is advancing proposals to reform Medicare by increasing competition and promoting greater efficiency in obtaining medical services and requiring greater contributions from those beneficiaries most able to meet their medical costs. They are welcome reforms but they are not designed to address Medicare’s long-term problems. Medicaid, like Medicare, implicates thorny and complex problems.
Social Security, however, is a problem that can be solved more easily provided our nation summons the will. President Bush struggled last year to convince the Congress that it makes sense to implement reforms to Social Security now. Congress took the politically safe course for the short term, leaving the American people quite vulnerable economically in the long term. Fixing Social Security is one case in which the old maxim “Don’t put off until tomorrow what you can do today” makes great sense.
Many Americans are disheartened by reports of large companies reneging on pension plans promised their employees, who understandably express anger upon being misled by their companies. Often the unions make unrealistic demands. The situation is not all that different with Social Security and the increasing unreliability of generous corporate pension plans makes Social Security reform all the more important.
Unfortunately, Congress refused to follow President Bush’s leadership when he addressed the need to reform Social Security last year. The clock keeps ticking. Starting in 2017, a shortfall will develop; more funds will be spent paying Social Security than are collected. Each year will see increasing shortfalls. “By the year 2027, the government will somehow have to come up with an extra $200 billion a year to keep the system afloat. By 2033, the annual shortfall will be more than $300 billion a year, “a White House fact sheet reports, adding that by 2041 the system is expected to be insolvent.
Americans truly depend on Social Security. It represents 90% of the total income for one-third of Americans older than age 65. However, the benefits of those now receiving Social Security are not truly threatened by reform, contrary to the scare talk offered by the critics of reform. Keep in mind that for every American receiving Social Security benefits there are 3.3 workers paying into the System, their money used to support current Social Security recipients. In 1950 it was one recipient for every 16 workers. In a little more than four decades there will be only two workers per recipient. Plus Americans are living longer, a demographic change that places an additional burden on the system. The Social Security Administration says the average American in 1935 had an average life expectancy of 12.5 more years. Now, the average 65 year old can expect to live 17.5 more years.
It is easy, as many in Congress have done, to oppose reform, using terms such as “irresponsible” and “dismantle,” to create fear in older voters. Expect to hear such charges as the fall election draws closer. One group, Americans United, has made clear its intention to oppose the call for reform issued by President Bush. Americans should keep in mind what Jo Anne B. Barnhart, Commissioner of Social Security, told the House Ways and Means Committee on May 17, 2005:
“While [Social Security is] in sound fiscal health in the near term, I believe -- as do my fellow Trustees – that the future projected shortfalls should be addressed in a timely manner to allow for a gradual phasing in of the necessary changes. The sooner adjustments are made, the smaller and less abrupt they will have to be.”
Even President William Jefferson Clinton viewed reform of Social Security to be important, calling it “unconscionable if we fail to act” in 1998 at a time when more attention was devoted to his impeachment. He had appointed a bipartisan commission examining options of cutting benefits, raising the retirement age and permitting 5% of their Social Security payroll taxes to be invested. “Nearly everybody knows that something substantial, really substantial, has to be done to reform the Social Security system to accommodate the Baby Boom generation,” Clinton stated on April 28, 1998.
President Bush, undeterred by the failure of his 2005 effort to implement reform, has made clear his desire to continue addressing Social Security until reform is achieved. “If we can’t get it done this year, I’m going to try next year,” he assured the Manhattan Institute. Americans should keep an open mind as to the need for reform. The system cannot stay the same. Eventually it will falter, forcing younger Americans to accept huge tax increases or significant benefit cuts to make up shortfalls.
Those who use the long-term problems of Social Security for short-term political gain need to be challenged more aggressively. It is they who in reality are the real backstabbers, resisting the introduction of needed changes for the want of election victories. It bears noting that the Democratic Party, its contingent in Congress nearly united in obstruction, does not have monopoly rights in opposing reform. There are opponents of reform who are members of the President’s own party. Critics of reform are like overly protective parents, preventing their children from acquiring needed changes to succeed as they grow older. Changing demographics mean Social Security must adapt and change to fulfill its promise to future generations. Critics must be forced to stop speaking in sound bites and start answering the tough questions about the system’s problems which are just over a decade away.
The continued interest by President Bush in advancing reform of the Social Security system should be met with an open mind by Americans. Too often the complaint is that government reacts to crises rather than preventing them. In this case the projections of a looming problem are quite clear and shoring up Social Security for the long term can endow the nation with the confidence to address the even more difficult problems afflicting the soundness of Medicare and Medicaid. This is one case in which President Bush deserves credit for placing the best interest of the country ahead of political expediency.
Ideally, a bipartisan commission could be convened to examine the difficulties confronting Social Security and to recommend effective solutions, such as investment accounts, that can provide a real return on the funds invested.
The sooner reform is achieved the better it will be for younger Americans.
Stephen M. Lilienthal is a policy analyst with the Free Congress Foundation.
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