NCPA - National Center for Policy Analysis

Getting a Handle on Entitlement Spending

August 28, 2003

Sometime in the summer of 2008 the total benefits paid out to Social Security and Medicare beneficiaries will exceed the payroll tax revenues paid in by workers. The difference, $390 million, will have to come from general income tax revenues, says Pete du Pont (National Center for Policy Analysis).

The $390 million amount is small -- only 0.02 percent of federal income tax revenues --but the payment will be the dawn of a new era of fiscal difficulty. Instead of receiving surplus revenues from these two programs, Congress will begin sending income tax revenues to them.

  • The money Congress will have to appropriate for the two programs will rapidly escalate -- to 5 percent of income tax revenues ($100 billion) in 2013, 16 percent in 2020 and 35 percent in 2030.
  • By 2050 half of all the money collected in federal income tax will be needed to pay Social Security and Medicare benefits.

So income taxes will have to rise or other spending will have to fall by 50 percent to keep the budget in balance. That is what President Bush referred to in his budget presentation last winter as "the real fiscal danger."

What is to be done? According to du Pont, the first step is to stop huge domestic spending increases. Secondly, he recommends the President keep enacting growth-inducing tax reductions that will get the economy back on its feet so that revenues will rise.

No modern government has ever taxed its way out of a recession; tax reductions to spur growth do that. JFK proved that; so did Ronald Reagan. Ask any governor of any state, or Art Laffer (who made famous the Laffer curve): Raising taxes may be necessary to pay the bills, but higher taxes hinder economic growth, explains du Pont.

Source: Pete du Pont, "Out of Balance: Bush's next challenge is to get spending under control," Wall Street Journal, July 21, 2003.

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