The Corner

Tax Reform Alone Won’t Solve the Coming Entitlement Crisis: Just Look at the Numbers

Last week, I mentioned that during the fiscal year 2016, the deficit grew from $149 to $588 billion. This also ended a downward trend in the ratio of debt to GDP, which had been falling since 2009: It now stands at 3.2 percent, up from 2.5 percent last year. The culprits behind these numbers are pretty clear: Spending on Medicare, Social Security, Medicaid, and net interest paid on the debt are up significantly. Together, they total $2,152 billion and make up 56.6 percent of the budget.

CBO breaks this down further:

‐Medicare spending climbed by $30 billion (or 5 percent) because of an increase in the number of beneficiaries, as well as growth in the number and cost of services for those beneficiaries.

‐Spending for Social Security benefits rose by $29 billion (or 3 percent), reflecting typical growth in the number of beneficiaries and in the average benefit payment.

‐Outlays for net interest on the public debt increased by $23 billion (or 9 percent), largely because of higher inflation in 2016. Outlays also increased because of higher debt and higher average interest rates in fiscal year 2016 than in fiscal year 2015.

‐Outlays for Medicaid grew by $18 billion (or 5 percent), largely because of new enrollees added by the expansions of coverage authorized by the Affordable Care Act.

At the end of the day, we can attempt to blame these numbers on either the reduction in corporate revenue or the lack of taxes on the wealthiest citizens, but the reality is that we are spending too much on these three programs and the so-called Affordable Care Act. They need to be reined in. Obviously, interest on the debt will go down when the spending goes down and deficits are reduced. This is the best solution; there is no secret cure.

In fact, it is so clear that immediate action is required that the left-leaning Brookings Institution recently published a paper about this issue. In the piece, Bill Gale and Aaron Krupkin sum it up this way:

What’s driving these trends? There is one simple answer – rising spending on Social Security, Medicare, Medicaid, and net interest. Net interest will rise because the debt (on which interest is paid) is already high and because interest rates are expected to rise. The major entitlement programs will grow, even in the absence of new initiatives. This is because of the increasing number of elderly people (due to the Baby Boomers retiring and life expectancy rising) and because the cost of health care will likely continue to rise faster than other goods and services.

They suggest that the answer would also have to include a mix of spending cuts and tax increases. Raising more revenue, other than by reforming our awful tax system, isn’t the answer, nor is it as easy as these authors make it sound. First, there could be significant, long-term negative consequences of raising taxes, especially in such a weak economy. In addition, it is unclear that our current tax system and economic-growth projections would allow tax increases — whether on the rich or on a broader portion of the population — to yield as much revenue as some hope.

Leaving our disagreement aside, Gale and Krupkin rightly conclude:

Of course, the size of the required policy changes gets even larger if we delay dealing with the issue, decide to pay down some of the debt build-up from the Great Recession, or want to maintain the debt-GDP goal after 2046.

So the next president, whomever he or she may be, should not ignore this problem. The longer we wait, the worse it gets.

That’s correct. And we agree that a solution cannot leave Social Security, Medicare, and Medicaid reforms off the table. And yet, neither Trump nor Clinton want to touch Medicare and Social Security. Together, these programs represent $1,500 billion in spending for this year alone, which is 40 percent of the federal budget. If these programs remain untouched, we will stay on an unsustainable path. In addition, it would become even more difficult to obtain an agreement from Congress on the discretionary parts of the budget. In other words, we can expect escalated conflict over the tiny discretionary portion of the budget that will remain up-for-grabs each year. Finally, as much as I would like to believe that the economy can return to 3.5 percent growth or more a year, growing ourselves out of this mess is not an option.

I hope that tonight’s moderator will not be shy about asking the candidates how they plan to extricate our country from this mess without touching Social Security and Medicare. 

Veronique de Rugy — Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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