March 11, 2010
Our long-term budget challenge can be summarized in one word: entitlements. Without Social Security, Medicare and Medicaid, the budget would be roughly in balance over the coming decades. But with these programs, and without reform, a fiscal crisis is inevitable. To balance the budget over the next 25 years would require an immediate and permanent 30 percent increase in all federal taxes. That is the future we face, and it is a future of our own making, says Andrew G. Biggs, a resident scholar with the American Enterprise Institute.
Entitlements traditionally have paid generous benefits -- financed by affordable taxes -- to rich and poor alike, because the ratio of workers to beneficiaries has been high. Those days are gone and will not return, says Biggs:
- Maintaining entitlements in their current form will require either crippling taxes or crippling debt.
- Alternatively, we can rethink the entitlement philosophy, focusing resources where they're needed most, empowering individuals to make choices and giving them incentives to reduce waste, and buttressing personal retirement savings.
We spend 9.7 percent of gross domestic product (GDP) on entitlements today and by 2030 we will spend around 14.4 percent. Two forces bear primary responsibility for pushing entitlement spending upward: population aging and health care-cost growth.
Population aging is easily understood:
- The baby boom generation is retiring, seniors are living longer and families are having fewer children.
- The ratio of workers to beneficiaries, which is now over three to one, will fall to around two to one by 2030.
- Aging alone will ultimately raise entitlement costs by nearly 50 percent.
As for health care costs, they are rising for three reasons:
- As incomes rise, the value of health increases relative to that of other goods (as you make more money, the marginal value of new goods falls, and you would rather live longer with the stuff you have than buy more stuff and die sooner).
- Technology generates treatments we gladly would have purchased in the past but couldn't, because they didn't exist; today they do, and we buy them.
- The falling share of health care that is paid out-of-pocket -- 47 percent in 1960, 12 percent today -- encourages patients to purchase even marginally useful treatments.
Source: Andrew G. Biggs, "Entitlement Apocalypse: What We Must Do to Avoid It," National Review, March 2010.
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