NCPA - National Center for Policy Analysis


August 12, 2009

Upon taking office, President Obama decided to postpone his campaign promise to implement a true cost-saving reform of Social Security and Medicare.  Instead, he's trying to expand the nation's entitlement offerings with massive new government spending on health care, say Jagadeesh Gokhale, a senior fellow at the Cato Institute, and Kent Smetters, a professor at the Wharton School.

But this new plan has a present-value shortfall of $13.6 trillion.  And that's just a start, say Gokhale and Smetters:

  • This enormous shortfall is equal to about 1.6 percent of all future projected gross domestic product (GDP), or 3.5 percent of all future payrolls subject to Social Security taxes.
  • This additional burden might actually seem manageable, but Obama promised that he would raise taxes only on those in "rich" households.
  • That's where the arithmetic gets interesting: funding the new health care plan on the backs of households making $200,000 or more per year would require permanently increasing their annual total tax payments by about 50 percent.
  • Most households making between $200,000 and $500,000 per year would not have enough money to pay their federal, state and local tax bills, much less eat.

But can't we expect the rich to pay even more?  Maybe for a few years but a major tax increase causes the tax capacity of the rich to shrink gradually, say Gokhale and Smetters.

Therefore, we can't allow federal health care subsidies to continue to grow faster than inflation indefinitely.  The challenge is to find ways to make the nation's commitments to retirees and others sustainable without harming economic growth prospects.

In this regard, the Obama administration is charting a course in the wrong direction -- expanding entitlements on the backs of our nation's job creators.  The math will work against the Obama administration and, eventually, against us all, say Gokhale and Smetters.

Source: Jagadeesh Gokhale and Kent Smetters, "Obama vs. Mathematics," National Review, August 6, 2009.


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