Basic Arithmetic: Short-Run Tax Increases And Long-Run Benefit Cuts To Fix the National Budget
In a recent New York Times piece, Peter Coy echoed the sentiments of some economists that only tax increases could fix the national budget. He’s right and he’s wrong. Simple arithmetic will tell you why.
First, the need for taxes: A very large share of federal outlays is scheduled to go to current and near-term retirees, whose benefit levels already are well in excess of the taxes collected to pay for them. Unless Congress is willing to cut benefits on which people have become dependent, the near-term pressure will be mainly on tax increases. Second, the need for benefit cuts: The automatic rate of growth of health and retirement benefits scheduled in the law exceeds forever the rate of growth of national income and revenues. Those promises can’t be sustained no matter how much taxes are increased.
Of course, the kicker in all of this is that we are an extraordinarily rich nation that continues to get richer. Whether or not budget reforms lead to larger government in the long run, we can do a lot of things, whether it’s getting the budget under control, supporting Ukraine or eliminating basic poverty. But as long as more than all of revenue growth remains committed to unsustainable promises made by decision-makers in the past, we’re only going to see the national debt and interest costs grow relative to our national income.
Right now, Social Security and Medicare Hospital Insurance are starting to run increasingly large deficits. The baby boomers continue to retire, while cash and healthcare benefits grow much faster than the revenues dedicated to those programs. As Coy points out, the trust funds related to those programs will soon run out of assets that are being sold to cover the shortfall between benefits paid and taxes received. Meanwhile, other government health programs, including Medicaid and Medicare Part B health insurance for out-of-hospital care, are also growing at a much faster rate than the income taxes and other revenues that cover those costs.
The current Congress only debates how much to cut discretionary programs that entail an ever-smaller part of outlays. Even if Congress eliminates all the growth in discretionary programs, the same imbalances apply: total spending still grows much faster than total revenues.
Note, however, that I referred to growing revenues and growing spending. Economic growth automatically increases real revenues. It’s the disparity in the growth curves that is at the crux of the nation’s budget dilemma.
That means that simply slowing down the growth curve in spending can bring about a sustainable budget long-term, eventually scheduling balances and even surpluses in future years that could both reduce the deficit allow a turning to other priorities.
Past Congresses created these extraordinary growth rates through a variety of provisions: increases in years of retirement support as we live longer, indexing of Social Security annual benefits so that they grow as fast as annual wages, and health programs with ineffective constraints on demand by consumers and on what health providers offer and charge.
Adding to these difficulties, the baby boomers keep retiring, so the share of the population paying taxes to support government programs keeps falling, and the share dependent upon government benefits keeps growing.
All this has been scheduled in the law for decades, known and ignored by elected officials almost as long. The required reforms, therefore, are much larger than otherwise would have been required. In effect, we’re boxed into tax increases in the short run, lower rates of growth in retirement and health benefits in the long run, and all the household and business adjustments that follow, to restore a sustainable budget.
Quite bluntly, as bad as all of this sounds, this is a problem for a rich nation that spends too much effort pacifying itself that it doesn’t need to make choices.
But… the Boomers paid in far more than the previous generation needed (to build the trust fund) and all dollars paid on Social Security go back into the economy (even as current workers accrue future benefits). Hard to see how Social Security beggars the nation. It’s a choice. It relieves the current generation of supporting their parents. The stock market is arguably more a Ponzi scheme than Social Security. With all due respect.