Politics & Policy

Entitlement Credit

The new majority has pledged fiscal restraint and laments the coming entitlement crisis. This budget puts their words to a test.

Most of the early commentary on President Bush’s proposed budget for the 2008 fiscal year, released yesterday, has portrayed it as a blowout. It is indeed big: $2.9 trillion, up a trillion from when Bush took office. There is a more important but less obvious story, however, and it should give comfort to a conservative heart: Bush’s budget would take a significant step toward reining in the runaway costs of Medicare, cutting trillions from the program’s unfunded liabilities.

Before we come to Medicare in more detail, a few numbers about the budget as a whole. The bulk of the increased spending would go toward Iraq and the War on Terror. The proposed defense budget for 2008 is $481.4 billion, up 11.4 percent from 2007. On top of this $481.4 billion are two supplemental requests for war funds; when these are added in, they push the total up to $716.5 billion. That is without question a lot of money. But wars are expensive. If the fight against terrorism must be waged (as we believe it must), and if the Iraq War is still worth trying to win (as we believe it is), then it is right and defensible to spend the funds needed to fight.

The White House says it plans to hold the growth of domestic discretionary spending to about 1 percent. (This number excludes outlays on such things as defense, homeland security, and foreign aid.) That would be a much slower growth rate than we have seen in a long time. Far better would be a complete freeze on domestic discretionary spending, and a requirement that every new dollar in priority spending (such as defense or homeland security) be offset with a dollar cut elsewhere. Alas, this isn’t going to happen.

Bush’s budget projects deficits of $239 billion in 2008 and $187 billion in 2009. This too is a lot of money, though markedly less than the record deficit of over $400 billion in the 2005 fiscal year. Bush hopes that economic growth will bring greater tax revenue and allow the federal balance sheet to cross back into black by 2012. Whether the economy will accommodate this hope is anyone’s guess. Critics of the president’s plan are likely to point out that it assumes no permanent change in the alternative minimum tax, which year by year nets more middle- and upper-middle-class earners. There is broad support among both Republicans and Democrats for stopping this trend; if Congress does so, actual tax revenues will be lower than Bush’s projections.

The reality, though, is that it doesn’t much matter whether the budget is balanced in 2012 or 2013, or whether the deficit in 2010 is $90 billion or $150 billion. The true crisis lies in the long-term unfunded liabilities of our entitlement programs. Bush’s budget begins to grapple with this fact by reducing the subsidies to upper-income retirees for services they receive under parts B and D of Medicare. Parts B (outpatient services, as contrasted with hospital visits) and D (the prescription-drug benefit) are not covered by the payroll tax, and retirees must currently pay a premium for them. Bush’s plan would use means testing to adjust premiums more appropriately based on a recipient’s ability to pay. There is no good reason retirees who could easily pay their own premiums should receive public assistance that dumps trillions of dollars in liabilities onto future generations.

And it is trillions. Bush’s changes to Medicare would, over the next five years, save some $66 billion; other savings would raise that number to just under $96 billion. These are not impressive numbers in the context of the overall budget. But over the long term, Bush’s plan would slice $8 trillion — or more than 20 percent — off of Medicare’s $39 trillion unfunded liability. That is nothing to scoff at.

Bush has earned a reputation, not wholly unjustified, as a spendthrift. But he deserves credit for making the most serious efforts in a generation to address the looming entitlement catastrophe. Such changes would be politically difficult in the best of circumstances, even without Democrats demagoguing the costs of an unpopular war. But the new majority has pledged fiscal restraint and laments the coming entitlement crisis. This budget puts their words to a test.


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