- The Washington Times - Thursday, February 1, 2007

In recent weeks, there have been tentative signs of bipartisanship on the federal old-age “entitlements” front. Right- and leftwing think tanks are talking. Big foundations are plotting bipartisan study groups. There are even whispers that President Bush may yet get the Democrats to play ball on his proposed entitlements commission.

But hold the champagne. The problem is that we haven’t actually defined the problem. And until we do, there is little chance that we will find the right solutions.

Let’s start with the basics. Next year, thefirst BabyBoomers will begin collecting Social Security. Most will embark on a retirement averaging 21 years with illiquid home equity and financial assets sufficient to replace barely one year’s pre-retirement income. They will be more dependent on government than any generation before them.

The government’s own projections show that entitlement shortfalls will equal 6.7 percent of GDP in 2030 and 10.1 percent of GDP in 2050. This means that paying Boomer benefits could lead to an increase in federal effective tax rates (i.e., after all tax breaks are taken into account) of 35-40 percent by 2030 and more than 50 percent by 2050.

Ironically, our greatest source of retirement insecurity is the network of programs designed to eliminate it. Senior citizen lobbies, like the mega-giant AARP, no doubt are laying plans to defend them. And they may succeed.

But it promises to be a long and exhausting struggle. Consider that today’s teenagers will never know a working year when the need for more tax revenue is not steeply climbing.

The political left has yet to internalize what this means for its distributive coalition. Advocates of every progressive cause from emission controls to Pell Grants will find the public’s willingness to bear noble sacrifice depleted by wave upon wave of grumpy granny-boomers.

To be sure, Europeans may seem content with public sectors that are currently much larger than our own. But look closely and you’ll notice that public spending in Europe today is not dominated by the elderly; everyone gets a share.

In contrast, the Congressional Budget Office’s intermediate spending scenario projects that Social Security, Medicare and Medicaid will rise from 46 percent of non-interest spending in 2006 to 68 percent in 2030 and 75 percent in 2050. This presumes no major savings in education, infrastructure or defense.

The political right, likewise, is deluding itself in thinking it can hold the line on taxes. No politician stands a pup’s chance at the polls if he tells the boomers to shell out money that, frankly, they never saved. Just ask the Bush administration, whose Medicare 2002 prescription drug initiative created $8.1 trillion in new taxpayer liabilities.

Our leaders are most confused, however, in labeling this problem an “entitlements” crisis. While Social Security is broken and cries out to be rationalized, the federal government’s looming revenue shortage stems even more from exploding health costs. Three out of four dollars of projected “entitlement” shortfalls in 2030 will be for medical and long-term care benefits.

And the government accounts for only about half of total health spending — meaning that private outlays will be growing apace. The same workers who will be shelling out more and more of their earnings to support the elderly will find those earnings depleted by rising employer health insurance premiums.

The cost of insuring a family of four now exceeds by a widening margin the earnings of a full time minimum-wage worker. Health costs have been a major factor behind the flagging cash compensation of the least-skilled. By focusing only on federal health budgets, we risk shifting costs onto employers and accelerating this downward trend.

The real problem is that there are only two ways to contain health costs. We can provide fewer medical services with fewer health professionals — in other words, rationing. Or we can pay our health professionals less.

Some countries, like Canada and the United Kingdom, rely heavily on rationing. Others, like Japan and Sweden, squeeze medical pay. Only America does neither. Little wonder that our health spending, at 16.4 percent of GDP in 2006, is 60 percent above the developed country average — or that our doctors are, by far, the world’s most highly compensated.

If health sector wages continue to increase at historical rates, and we don’t embrace rationing, U.S. health spending will surpass 32 percent of GDP in 2030. Down this path lies ruin for our competitiveness, prosperity and social cohesion.

China’s great modernizer Deng Xiaoping introduced “be practical” into the liturgy of Communist Party sloganeering. He famously said “It doesn’t matter if a cat is black or white, as long as it catches mice.” Translation: pragmatic solutions trump ideology.

Until Republicans and Democrats take a page out of Chairman Deng’s book and do something practical about containing health costs, don’t look for progress on “entitlements.”

Richard Fairbanks, a counselor at the Center for Strategic and International Studies, and Paul S. Hewitt are respectively the chairman and executive director of Americans for Generational Equity.

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