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ANALYSIS: Deflate balloon of entitlements

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The Wall Street meltdown has sent shock waves through the economy. But it's nothing compared to what's coming if Washington fails to address - properly and soon - its unfunded obligations for Medicare, Social Security and other federal entitlement programs.

In all of these programs, politicians have promised benefits that far outstrip expected revenues. Unless the promises are scaled back, taxpayers will have to make up the difference.

The potential taxpayer bailout for Medicare alone is 50 times greater than the recently passed bailout bill. For all entitlements, the potential tab totals 80 times today's bailout.

Short of panicking, what can we do? Well, a group of experts from diverse think tanks - including Brookings, the Heritage Foundation and the Urban Institute - proposed a strategy last spring that anticipated some lessons of the current crisis.

Lesson one is transparency: If we can see the problem, we can focus on fixing it. Unfortunately, the congressional budget process keeps the looming entitlement crisis hidden from the public. Budgets typically look only at entitlement costs over the next five years, completely ignoring later years when an aging population will make costs explode.

It's like signing up for a subprime mortgage, without asking what the balloon rate will be. That's how we got a "$400 billion" Medicare drug bill that is projected to require an $8 trillion bailout.

The strategy endorsed by 16 budget experts, including this author, calls for the full, long-term picture to be disclosed prominently during the budget process and for any spending bill. As they say in Alcoholics Anonymous, the first step to recovery is admitting you have a problem.

The second lesson is that we need to create a serious budget for dealing with risky programs and to renegotiate unwise commitments. The strategy - Taking Back Our Fiscal Future - calls on Congress to set a firm budget for programs such as Medicare with a plan to finance them.

"What? They don't have a budget already?" That's right.

Imagine you gave your teenager a no-limit American Express card and told him or her to use it to buy the things he or she really needs. Guessing the total costs of the special cell-phone ring tones and other "necessities" he or she would buy would hardly be a budget. But that's how the Medicare "budget" works. Retirees are entitled to go to a doctor, hospital or pharmacy when they think they need to and then send the bill to Medicare. The "budget" is Washington's pure guess at what the total future cost might be.

The 16 experts urge replacing that no-limit credit card with a fixed-amount debit card. Just as that would put your teenager on a real budget, so it would make Medicare and other entitlements live within a real budget.

What if a program went over budget? One of two things would happen. Either "triggers" would impose automatic reductions in payments to doctors, changes in deductibles, etc., or the budget would need to be revisited.

Maybe the decision would be to curb some promises, such as the commitment to pay 75 percent of every retiree's prescription costs, even if they're billionaires. Or Congress could, I guess, elect to continue generous benefits to all - without regard to real need - by eliminating programs it judges to be "less important," such as, say, education or homeland security. Or it could decide to fund everything ... and simply double everyone's taxes.

Any way you slice it, putting entitlements on a budget would force a real debate - one in which the American people could learn what's at stake and voice their opinion. That's a big contrast with today's murky budgeting and unfunded promises, which has given us entitlement programs based on the same delusional financing as subprime mortgages.

• Stuart Butler is vice president for domestic-policy issues for the Heritage Foundation (heritage.org).

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