FAIRFAX, VIRGINIA – At their recent national conventions, America’s two main political parties devoted a lot of time on the podium to addressing how they would reduce the country’s annual deficits and national debt. Indeed, the United States has run four straight trillion-dollar deficits, driving the national debt to a record $16 trillion, and threatening to weaken the dollar and derail the global economic recovery.
While US debt might be a deciding factor in the upcoming presidential election, its origins are not as clear as many claim. Neither President Barack Obama nor former President George W. Bush should be blamed. Assertions by Republican Party leaders that excessive social support is the primary culprit – a favorite theme of vice-presidential candidate Paul Ryan – are just as mistaken as Democratic Party leaders’ claim that permitting tax cuts for the wealthiest Americans to expire at the end of this year would cure all.
In fact, no single president, party, or policy is responsible. Rather, the problem is rooted in the period from the 1930’s to the 1970’s, when bipartisan majorities enacted – or supported the expansion of – the popular Social Security and Medicare programs, which provide, respectively, pensions and health care to senior citizens.
When Social Security began to pay benefits in 1940, only 55% of men (at the time, few women qualified for full benefits) reached age 65. Today, 87% of all Americans live to 62 – the age at which many begin to receive Social Security payments. Since 1950, the number of Americans over 65 has more than tripled, from 12.3 million to 40.2 million, while the total US population has only doubled. Indeed, Americans’ life expectancy beyond age 65 has increased by roughly 40%.
Moreover, health care for the elderly in the 1950’s consisted mainly of aspirin, antibiotics, and fluids, with an iron lung in emergencies. Heart attack, cancer, and even falls were often fatal. But, as technological progress has increased options for saving, extending, and improving lives, health-care costs have skyrocketed, raising Medicare costs from 3.5% of federal expenditures in 1970 to 15.1% today.
In the 1950’s-1970’s, American policymakers made three crucial policy decisions, opting for a privatized, market-driven health-care system that provides the world’s most expensive care; basic pensions indexed to inflation for all seniors; and free health care for all senior citizens. These decisions, along with increased life expectancy and escalating health-care costs, drove a massive increase in transfer payments over time, regardless of which party was in power.
This year’s federal budget allots $1.9 trillion – more than half of all annual federal expenditure – for health care (including Medicare, Medicaid, and veterans’ benefits), Social Security, and federal retirement. Meanwhile, the entitlement programs that Republicans denounce, such as unemployment benefits, school lunches, and food stamps, amount to less than one-third this amount – roughly $600 billion – even after four years of record-high unemployment.
Under President Bill Clinton, the US budget was balanced, because baby boomers had reached their prime earning years, when their Medicare and Social Security payments more than covered these programs’ costs. This explains why the Congressional Budget Office gave a pass to the Bush administration’s prosecution of two large wars while cutting taxes.
But the CBO also warned that in 2011, when the baby boomers (whose leading edge reached 65 that year) began to retire, Medicare and Social Security costs would surge, while pay-ins would decline. For that reason, the Bush tax cuts were originally set to expire in 2010.
To be sure, additional factors have exacerbated the situation. For example, Social Security taxes are collected on only the first $110,000 of annual income. But, since the 1980’s, most Americans’ wages have stagnated, while incomes for those earning more than $110,000 have soared. As a result, total wages grew significantly more than Social Security tax revenues. Furthermore, Medicaid eligibility has expanded faster than anticipated, owing to an increase in the number of Americans living in poverty.
Nevertheless, the core problems remain changing demographics and escalating health-care costs, and the US can get its deficit and debt under control only if policymakers address these issues, rather than blame “runaway spending” and “entitlement programs.” They must begin by restructuring retirement to compel people to work longer, at least part-time, and wait until they fully retire to enroll in Medicare.
They must also reform Social Security taxation and benefits through less generous indexing, increased means testing, and a higher income cap on Social Security taxation. Likewise, they should adjust eligibility ages to reflect rising life expectancy (as several other countries have).
Moreover, US policymakers must find ways to limit health-care costs, bringing them in line with costs in other rich industrialized countries. Republican presidential candidate Mitt Romney has praised Israel’s health-care system, for example, noting that it spends only 8% of its GDP on health care, while the US spends 18% of GDP. (Ironically, Israel’s health-care system resembles a more intensive Obamacare program, with mandatory insurance and strong national regulation to contain costs, which Romney opposes.) By matching Israel’s health-spending efficiency, the US could cut the cost of Medicare and Medicaid by $400 billion annually and eliminate nearly half of the federal deficit.
Finally, US leaders should allow the Bush tax cuts to expire and phase out tax loopholes that largely benefit the wealthiest. These steps would alleviate pressure on the federal budget, without requiring a further increase in income taxes or cuts to defense and other federal spending.
Clinton’s administration showed that a balanced federal budget, even with higher taxes, supports stronger economic growth than lower taxes with vast deficits. Campaign rhetoric suggesting simple solutions like reducing “handouts” or taxing the rich is mere fantasy. To address today’s deficit, policymakers must recognize its true causes, and seek real solutions – even as they confront significant challenges in winning political support for deficit-ending policies.