Entitlements Must Be Reformed
November 4, 2011
The American debt-to-gross domestic product (GDP) ratio continues to baffle those who look for solutions. Even if lawmakers allow the Bush tax rates to expire at the end of 2012, the debt-to-GDP ratio is still projected to increase dramatically over the next decade. At the core of the issue, which will become even more significant with the retirement of the baby boom generation, are Social Security, Medicare and Medicaid. Realistic debt plans will have to include some reform to rein in the growth of entitlement program spending if they are to derail America's unsustainable course, says Veronique de Rugy, a senior research fellow at the Mercatus Center.
This focus on wealth transfer programs is evinced by two separate conclusions provided by recent international studies. In looking at 100 instances in which a given country attempted to reduce its debt ratio, researchers categorized these efforts into successes and failures, with success being defined as a 4.5 percent decrease in the ratio three years down the road.
Their first conclusion that supports spending cuts in entitlements is that successful government efforts usually relied upon spending cuts over tax increases.
- The typical unsuccessful fiscal consolidation consisted of 53 percent tax increases and 47 percent spending cuts.
- By contrast, the typical successful fiscal consolidation consisted of 85 percent spending cuts.
- This suggests that the classic, seemingly-cooperative method of balancing spending cuts with tax increases has an empirically-verifiable probability of failure.
The study's second conclusion, which further advocates entitlement reform, is that within those successful government efforts, spending cuts were usually concentrated within public-sector wages and benefits and social transfers.
These two conclusions ought to compel American lawmakers to study more closely international examples of other countries that have overcome the same issues that it faces today. In doing so, it seems undeniable that it will come across the same solution from a variety of successes and failures: entitlements must be reformed.
Source: Veronique de Rugy, "Upgrading the U.S.," Reason Magazine, November 2011.
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