At the Senate confirmation hearing for Treasury Secretary Henry Paulson, there was much discussion about the need to address the long-term unfunded obligations of Social Security and Medicare. Despite universal recognition of entitlement spending’s growth, there is anything but consensus as to its solution. In fact so far from an agreed-to solution are we, that the time has come to shift our focus from what a solution should be to how it will be achieved.
By looking at the economic impact of the coming federal entitlement explosion and the likely political resources needed to address it, some startlingly unconventional conclusions become clear. Because the fiscal pressure will build with the Baby Boomers’ retirements, the fiscal explosion will not be sudden and its resolution will not be short. Because this fiscal pressure will build only gradually, its resolution will not be soon. And looking historically, the precedents don’t indicate a bipartisan solution. As a result, America needs to rethink its economic and political assumptions, not just for the near-term but for many years to come.
It is undeniable an enormous increase in the federal government’s claim on America’s economy will begin soon without significant federal entitlement spending reforms. While conservatives and liberals may argue whether such a redistribution of resources is a crisis, there must be agreement that the scale of redistribution will rival anything seen before.
To appreciate the scale of this resource shift, we can look at the nonpartisan projections of the Congressional Budget Office. As the CBO noted in January, national health expenditures’ 1960-2003 average annual rate of growth exceeded GDP’s by 2.6 percent. If continued, “federal spending for Medicare and Medicaid would rise from 4.4 percent of GDP today to about 8 percent in 2020 and 22 percent in 2050.” According to the Trustees’ latest report, Social Security spending will rise from 4.2 percent of GDP now to about 5.3 percent in 2020 and 6.4 percent in 2050.
Conservatively assuming today’s non-Medicare/Medicaid/Social Security portion of the federal budget stays at today’s 11 percent of GDP, the federal budget will grow respectively to 24.8 and 39.9 percent of GDP in 2020 and 2050. That amounts to a roughly 25 percent increase in the government’s share of the economy in just the next 15 years and almost a doubling over the next 45 years. By any measure, that is a staggering redistribution of resources from the private to the public sector.
Such resource realignment has only happened on two other occasions in modern U.S. history. The first was the 1930s’ New Deal. Pre-New Deal (1930-1932) average annual spending roughly doubled from 4.9 percent of GDP to 9.6 percent (1933-1941). The second is the post-World War II period when federal average annual spending has roughly doubled again to 19.6 percent of GDP (1946-2005).
These fundamental changes in private/public resource distribution were the result of two aberrational imbalances in the federal government’s elected branches and two fundamental public policy changes. The first was Franklin Roosevelt’s 1932 presidential landslide, when 1933-38 saw Democrats average 323 House and 68 Senate seats. The second was Lyndon B. Johnson’s 1964 presidential landslide, when 1965-66 saw Democrats hold 295 House and 68 Senate seats. Significantly, the first period saw enactment of Social Security and the second Medicare and Medicaid — today’s entitlement cost-drivers.
While the coming redistribution of resources is on a scale with those of the past, there is a fundamental policy difference: In the past this redistribution required legislative action. The coming one, because of the automatic nature of entitlement spending, will require legislative action to prevent it. If the past policy changes triggering this massive resource reallocation required preponderant majorities, why not the reforms needed to address the future’s coming one?
If so, the reallocation of political resources must be on no less a scale than the coming reallocation of the nation’s economic resources. The current majority Republicans would need to add another 85 House and 13 Senate seats to equal the average of the four Roosevelt-Johnson Congresses. Minority Democrats would need another 115 House and 23 Senate seats. Considering that the coming elections, like the last several, are focused on simple control of these bodies — with just 15 House and 6 Senate seats now holding the balance of each body — the dramatic shift would need to be qualitative as well as quantitative, and that’s unlikely. Democracy in general, and America’s in particular, only moves by crisis, and none currently exists.
And the approaching fiscal crisis won’t come suddenly. It will build gradually as Baby Boomers enter the entitlement programs — beginning in 2011 for full retirement. The Social Security and Medicare trust funds are currently projected to begin running deficits in 2017 and 2006 respectively. These deficits represent when money will begin transferring from the General Fund to meet obligations.
Serious as the consequences will be, they won’t be immediate, but build over time as resources increasingly drain from the private sector to cover public sector obligations. As Japan, the world’s second-largest economy, demonstrated for well more than a decade, repercussions as serious as minimal economic growth can be endured for some time. Whether America would be so patient remains to be seen.
What does all this mean? That contrarian realism needs to supplant conventional wisdom. A near-term, bipartisan solution coming before the entitlement crisis’ impact is unlikely. At the same time we need to come to grips with the problem, we need to come to grips with the implications and limitations its resolution is likely to hold. The political will, the political resources and the action-forcing event are not yet in place. Neither will the entitlement explosion resemble the past. Unlike past episodes, it will be a resource realignment triggering a political realignment and these realignments will not be sudden, or unexpected.
In one very important regard, the coming entitlement explosion will follow current conventional wisdom and past realignment episodes: it will be cathartic.
J.T. Young served in the Treasury Department and the Office of Management and Budget from 2001 to 2004.