NCPA - National Center for Policy Analysis


March 10, 2009

The major entitlement programs -- Social Security, Medicare and Medicaid -- constitute 40 percent of total federal spending.  As entitlement spending increases, each year without action raises the cost of reform, says Andrew Biggs, a resident scholar with the American Enterprise Institute. 

Take Social Security for example:

  • Social Security's finances will decline due to a combination of over-generosity to early beneficiaries, changing demographics and falling birth rates -- which means fewer new workers paying into the system.
  • As a result, benefit costs will exceed annual tax revenues beginning in 2017; by the late 2020s, the system will run annual deficits exceeding $200 billion and the Social Security Trust Fund is projected to be exhausted by 2041.
  • President Obama proposes imposing a new payroll tax of between 2 percent and 4 percent on earnings over $250,000.

Medicare and Medicaid, on the other hand, face one more additional challenge: rapid increases in health care costs, says Biggs:

  • Over the past 30 years, health care costs have grown 2 percentage points faster each year than the economy as a whole.
  • Health care cost inflation results from improved technology that makes new treatments available, rising incomes and declining shares of total health spending paid out of pocket.
  • Even without demographic changes, Medicare and Medicaid would face multi-trillion dollar deficits.
  • Obama proposes increasing coverage among the working age population, not on restraining cost increases in Medicare and Medicaid; he aims to generate $2,500 in annual savings per family through better management in health care.

Yet, while health and pension reform is a daunting task, if the Obama administration works in good faith with Congressional Republicans and outside stakeholders, then progress on fixing the major entitlement programs is possible, says Biggs.

Source: Andrew G. Biggs, "Will 'Fixing' Entitlements Mean New Taxes?" In "13 Questions That Advocates of Free Markets and Limited Government Should Be Asking," The Insider, Winter 2009.

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