Next up, entitlement programs

With the so-called tax reform bill behind him, House Speaker Paul Ryan wants to reform and modernize the big three entitlement programs: Social Security, Medicare and Medicaid. It’s something that needs to happen, but it won’t be easy – especially in an election year.

The speaker is under pressure from conservative House members and deficit hawks, who supported the tax reform legislation that added a whopping $1.5 trillion to the national debt in exchange for a commitment to address entitlements and deal with debt and deficits.

Entitlement costs are rising as the population grows older and sicker. Even if you assume that cutting the corporate tax rate will unleash economic growth, the tax cuts are highly unlikely to pay for themselves. We cannot grow our way out of the looming entitlement crisis.

But the speaker’s plan to overhaul entitlement programs may run into the harsh political reality that not all Republicans are on board in an election year in which control of Congress is up for grabs.

Looking to preserve the GOP’s narrow Senate margin the Senate, Majority Leader Mitch McConnell has thrown cold water on the idea of entitlement reform. He would prefer to focus on the long-awaited infrastructure funding plan, which is more of a bipartisan exercise.

During his campaign, President Trump repeatedly promised not to cut Medicare, Medicaid, or Social Security. Of course Democrats say the Republicans plan to pay for the tax bill with cuts to entitlements and the social safety net.

There is no strong constituency for the tough budget cuts needed to limit the size of government or reduce the national debt.

Broadly speaking, entitlements are government financial benefits to which beneficiaries have a legal right. The most important examples of federal entitlement programs include Social Security, Medicare, and Medicaid, unemployment compensation and food stamps. And don’t forget agricultural support programs.

You can debate the merit of these programs, but one thing is clear: entitlements are expensive, and for a long time the cost has either been ignored or passed on to future generations.

Nearly half of all U.S. households benefit from at least one federal entitlement program. Entitlement spending today is about a tenth of U.S. gross domestic product, meaning one out of every ten dollars Americans earn goes to pay for Medicaid, Medicare, or Social Security. As the government struggles to pay for these programs, the number of recipients grows as people live longer thanks to advances in medical care.

This means they are drawing more benefits over their lifetimes than the funding systems were ever designed to generate. Since Americans are having fewer children, fewer workers are paying into the system. The Affordable Care Act also increased the number of people eligible for Medicaid.

According to the Center on Budget and Policy Priorities, about half the federal budget is spent on Social Security and health care programs like Medicare.

Another 16 percent goes to national defense and 6 percent to paying interest on the national debt. That does not leave much, especially as entitlement costs rise. If these programs are not fixed, they will consume the entire budget, leaving nothing to clean the environment, repair roads and bridges, and address countless other needs.

Nobody, including Speaker Ryan, is talking about actually cutting entitlement programs. The goal is to restrain increases and make the programs sustainable going forward. On a positive note, there are approaches that enable the U.S. to fix the programs while exempting current beneficiaries.

For example, consider containing health care costs by focusing more on preventative care and improved management of chronic conditions like obesity and diabetes. As for Social Security, consider gradually raising the full retirement age and eliminating the current payroll tax cap.

If these choices don’t seem palatable, it’s important to remember that the biggest threat to the big three programs is to continue down the path of least resistance and do nothing at all.

Originally Published: January 20, 2018


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