ECONOMY JUNE 1, 2011
Listening to today’s debates, one might think that the United States faces a budget deficit. Not so. America faces two budget deficits. The first challenge is near term. Once the economic recovery is well-advanced, we must find a way to cut spending or raise taxes to prevent government debt from rising faster than income. The second challenge is dual: to slow the growth of health care spending, in general, and Medicare spending, in particular, and to decide whether to make cuts to Social Security. Treating the two budget challenges as one, however, just hampers efforts at finding an adequate solution to either.
To understand why the debate about the role and size of social insurance is largely independent from the debate about closing the near-term deficit, consider the proposals advanced by House Budget Committee chairman, Representative Paul Ryan. The Medicare conversion he proposes would not take effect until 2023. The plan makes no mention of Social Security. In the past, Ryan has proposed pension cuts, but only after a delay of seven years. Likewise, various budget commissions have endorsed long-term changes in Social Security. None, however, has suggested changes that would save more than a pittance over the next decade.
The bipartisan unwillingness to cut benefit for people who are retired or nearing retirement is based on two solid foundations. First, it is bad policy. People who are retired or about to retire would have no time to adjust to major cutbacks in Social Security and Medicare. Belying talk of greedy geezers, median income of people over age 65 was less than $25,000 a year in 2008. Fewer than one in four had income over $50,000. Added work may be an option for some, but not for most. Second, it is bad politics. The elderly vote in large numbers. They would, with justification, punish elected officials who renege abruptly on longstanding promises. That is why implementation of most of the cuts on Social Security benefits enacted in 1983 didn’t even start until 2000 and won’t be fully implemented until 2022—and then only for new retirees. These two considerations explain why Representative Ryan delayed replacing Medicare with a cash voucher for twelve years.
But near-term deficit reduction cannot wait that long. No one knows just how high the outstanding U.S. debt can go before investors, private and public, at home and abroad, come to doubt the nation’s capacity or willingness to service that debt. Some nations, less economically robust than the United States, have gotten into trouble when their debt was less than annual output, but the prevailing consensus is that the United States would be well advised to prevent its total debt from exceeding its annual income, particularly because so much of that debt is held abroad and the United States is currently running large trade deficits as well. Under current projections, the 100 percent threshold will be crossed sometime after 2020, but well before 2025. In short, the job of cutting the deficit must be finished in ten to twelve years.
Quite independently, a debate over the size and role of social insurance is entirely appropriate and salutary. The nation’s two principal social insurance programs are too big and too central to the lives of individual Americans and to the functioning of the entire economy to escape scrutiny as circumstances change and views evolve. It is necessary, as well, for the nation to debate how best to rein in the growth of health care spending. Whether or not measures to slow the growth of spending on these two programs prove eventually to be necessary, they can not materially affect the fiscal balance within the next decade.
Right now, however, the U.S. budget deficit equals 10 percent of gross domestic product, and one can explain the entirety of it without mentioning Medicare or Social Security. All of the current deficit and all of the deficits projected for the next decade can be explained—fully explained—by tax cuts enacted during the Bush administration, the costs of two wars, the economic downturn and measures to counter it, and the costs of servicing the resulting debt. Were it not for these factors, the budget today would be fully in balance.
Economic recovery will lower the deficit, but not enough. Additional measures will be necessary to stop debt from rising to potentially dangerous levels. Cuts in Medicare and Social Security spending, as a practical matter, cannot be agreed to and implemented fast enough to contribute materially to meeting that challenge. The only solutions are cuts in other government spending or tax increases.
Cutting the nation’s deficits as soon as the recovery is well under way is therefore imperative. Deciding how much the nation can and should spend on health care and pensions will be a long and tortuous debate—as is proper. But linking the two is virtually guaranteed to delay essential near term measures that would help sustain America’s hard-earned and priceless reputation as the world’s safest financial center.
Henry J. Aaron is a Bruce and Virginia MacLaury Senior Fellow at the Brookings Institution.
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