A Perfect Fiscal Storm

Author: Will Marshall

Published: July, 2004

Republicans have drawn some dubious parallels between Ronald Reagan and George W. Bush lately, but one fits like a glove: Both men sacrificed fiscal responsibility on the altar of tax cuts and heedlessly piled up huge budget deficits. The difference, this time, is that America doesn't have a decade to whittle down the Bush deficits, because a demographic tsunami is just about to break over us.

The nation's debts are ballooning at the worst possible time -- just as 77 million baby boomers start reaching retirement age. The conjuncture of growing deficits and debt and the boomers' cascading health and retirement costs makes for a perfect fiscal storm. Yet it's an entirely foreseeable, and therefore preventable, calamity -- if we act now.

And let's be clear about one thing: It will not be older Americans who suffer because we failed to act. It will be working families and children.

The first step is to stop whacking ourselves in the head with a fiscal hammer. This year's federal budget deficit is expected to total a whopping $450 billion. Thanks to the Bush deficits, we are on track to add more than $4 trillion to the national debt over the next decade. Interest payments on the debt will double by 2010.

The White House blames both war and recession for the drastic deterioration in the nation's financial health. A good case can be made for running deficits to make Americans safer and stimulate the economy. But the Bush tax cuts have gouged a much deeper hole in the nation's finances than have the wars in Afghanistan or Iraq. And with the economy growing at a healthy clip, there's no longer any excuse to delay putting our fiscal house back in order. This is what Reagan did in agreeing to a tax hike after the economic expansion of the 1980s got under way, but Bush has stubbornly refused to follow the Gipper in embracing fiscal sanity.

But even if we rolled back Bush's tax cuts for the wealthy, and even if we reimposed budget caps and other constraints on discretionary spending, we'd still be left with the core dilemma: Social Security and Medicare are growing at unsustainable rates and gobbling up a greater share of public spending.

Spending on these massive entitlements, measured as a share of the nation's output, is projected to more than double from 7 percent today to 15 percent by 2040, when the last of the boomers retire, then rise to 20 percent in 2078, because of increases in longevity. That is more than the federal government collects in taxes each year (down to 17 percent of output now, but historically averaging about 19 percent).

In other words, unless we slow the growth in entitlement spending, Washington eventually will have to double federal taxes or devote every penny it collects to the needs of older Americans.

"Of course, policymakers aren't likely to zero out all spending on working families and children," allows Eugene Steuerle of the Urban Institute, one of Washington's most astute budget analysts. "They could instead revamp elderly programs, reform taxes, or do both. But here's the rub: Programs for the politically disadvantaged wear stone slippers in the dance of budget legislation."

Entitlement programs for the elderly receive large, automatic, built-in increases. For example, says Steuerle, current law promises a couple now in their early 40s about $1 million in government benefits when they retire. Compare that with discretionary programs for families and children, which must slug it out in the legislative arena each year for scraps of a shrinking budgetary pie.

As this budget squeeze intensifies in the years ahead, we will see the paralysis of domestic policy, as automatic entitlement growth underwrites present consumption, while leaving no room for investing in people. If progressives really care about better schools, universal health coverage, safer streets, a cleaner environment, scientific and medical research, upward mobility for poor families, and modern energy and transportation systems, they'd better start raising hell over this state of affairs.

That's also why we need to get serious about reforming Medicare and Social Security. Instead, Congress last year passed a monstrous, $534 billion prescription drug bill, widening Medicare's long-term deficit without tackling the causes of its explosive cost growth.

On Social Security, lawmakers in both parties remain locked in a phony war on "privatization" instead of taking tough actions now to close the system's long-term funding shortfall.

That's the bad news. The good news is that America is a rich country and can afford to treat the elderly decently without starving public investments in working families and children. But that will require big changes in Washington, and more political courage than either party has shown lately.

Will Marshall is president of the Progressive Policy Institute.