True Entitlement Reform Will Hit Upper and Middle Classes

June 7, 2012

Two months ago, the House of Representatives adopted a budget resolution that outlines the Republican majority's ambitious plans to slow the growth of federal entitlement spending.  Unfortunately, House Republicans run the risk of succumbing to an economically flawed approach that emphasizes cuts in low-income entitlements rather than reductions in the larger middle-class entitlements, says Alan D. Viard, a resident scholar at the American Enterprise Institute.

Plans that target only the country's poorest citizens not only lend credence to charges of class warfare, they also reduce opportunities to realize real savings.

  • Programs such as Medicaid and food stamps face severe cuts in the name of budget balancing.
  • However, Republican plans leave enormous programs such as Medicare and Social Security untouched or with only modest reforms.
  • Granted, Medicaid, together with related health subsidies, is slated to grow from 1.9 percent of gross domestic product (GDP) in 2011 to 3.7 percent in 2035 -- a 1.8-percent expansion.
  • However, this pales in comparison to 4.3-percent-of-GDP expansion of Medicare and Social Security (from 8.5 to 12.8 percent).
  • Meaningful reform would target all programs that are taking over the federal budget -- not just those that are politically easier.

Looking specifically to the Paul Ryan plan, we can see that this is exactly the trap that congressional Republicans are currently falling into.

  • The plan would cut $36 billion from the nation's food stamp program that is geared exclusively toward the lowest income Americans.
  • Meanwhile, it would leave subsidies for middle- and high-income farmers untouched.
  • Similarly, the plan makes only vague calls for eventual reform of Social Security at an unspecified future date without offering any real plans for how to accomplish this savings.
  • Finally, Medicare also manages to escape much of the expenditure-cutting axe: while measures to cut costs are included, they wouldn't take effect until 2022 and, even then, it would apply only to new Medicare beneficiaries.

The long-term fiscal gap won't be closed by undermining the safety net for the bottom 20 percent, any more than it will be closed by merely raising taxes on the top 1 percent.  To close the gap, the middle class will have to bear much of the burden.

Source: Alan Viard, "True Entitlement Reform Will Hit Upper and Middle Classes," Real Clear Markets, May 23, 2012.

For text:

http://www.realclearmarkets.com/articles/2012/05/23/true_entitlement_reform_will_hit_upper_and_middle_classes_99681.html

 

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