The Boomers' Time Bomb Denial
By Robert J. Samuelson
Wednesday, January 7, 2004; Page A21
Just for the record, the Congressional Budget Office recently issued a report telling us what everyone already knows: The federal budget is drifting into a future of unprecedented tax increases, huge deficits or both. This is no secret, because the great driving force of change is the impending retirement of 77 million baby boomers and their heavy claims on federal retirement programs. But in Washington, the CBO's irrefutable conclusion won't produce any noticeable reaction, because there's already a clear bipartisan policy concerning the future: Forget about it.
To leaders of both parties, offending today's voters with unpopular solutions to future problems makes no sense. Indeed, Republicans and Democrats will gladly worsen tomorrow's problems to win more of today's votes. President Bush did precisely that in successfully advocating a new Medicare drug benefit. Although Democrats criticized him, their complaint was that the new benefit isn't generous -- aka expensive -- enough.
It's expensive anyway. The spending is usually described as $400 billion over the next decade, but the CBO report says that when the drug benefit is fully phased in, it will cost about 1 percent of gross domestic product annually by 2030. That's about $110 billion in today's dollars, and these costs will simply increase total spending for Social Security, Medicare and Medicaid (Medicare provides basic health insurance for the elderly; Medicaid covers some nursing home care).
Now, let's examine the overall numbers. In 2002 total federal spending (except interest on the debt) was 17.8 percent of GDP. Under one CBO projection, that increases almost two-fifths, to 24.5 percent of GDP, by 2030. Another projection shows an increase of only a sixth, to 20.8 percent of GDP. The main difference between the two projections involves assumptions about higher health costs, but unfortunately both projections may be optimistic. Why? Well, the CBO offsets some of the higher spending for the elderly by assuming modest reductions in other federal spending as a share of GDP from 2002 levels.
Under both projections, defense spending declines to its lowest share of GDP since 1940. And then there's the rest of government: homeland security, national parks, health research, school aid, highways, food stamps, meat inspections -- and much more. This spending also drops as a share of GDP. If you assume these cutbacks don't occur spontaneously, then federal spending in 2030 could be higher than the projections -- and they don't include interest on the debt (about 1.5 percent of GDP in 2003) or allow for big emergencies. What if there's an epidemic that dwarfs AIDS?
All projections involve huge uncertainties, but federal spending is clearly moving toward a higher plateau. Immense tax increases would be needed to pay for this spending. In the past 30 years, federal taxes have averaged 18.4 percent of GDP, slightly higher than they are today. Raising taxes from this level to, say, 24 percent of GDP involves an increase of almost a third, amounting to $600 billion a year in today's dollars. How well would the economy fare with much higher taxes? No one knows. But choices inevitably will be made. If spending -- on the elderly or everything else -- isn't cut or taxes raised, deficits will spin out of control.
What's astonishing is that the problem has been known for decades. A prudent society would have prepared by adjusting federal retirement programs to emerging social and economic realities. People can pay for their own retirements through savings and, possibly, part-time work, or they can rely on others, mainly workers and taxpayers, to pay through government programs. As life expectancy improved, the obvious response was to begin gradually -- with much advanced warning -- raising eligibility ages and tying benefits more to income. This would have encouraged saving and tempered future increases in federal spending.
Little was done. Political leaders of the "greatest generation" ignored the future, and now their baby-boomer successors -- led by presidents Clinton and Bush -- are doing the same. But not all blame belongs with leaders. In a new book, "Who Will Pay?" economist Peter Heller of the International Monetary Fund observes that average citizens have been enablers of the politics of denial. No less than their leaders, they're shortsighted, he argues. Or perhaps just selfish.
The longer choices are postponed, the harder they become -- and they've already been delayed so long that they can't be easy. Prospective baby boom retirees may assume that their children will always pay the costs of federal retirement programs. This may be an illusion. As Heller notes, one possible response to a future budget crisis would be for government to "abandon or suddenly scale back on" commitments to retirees. Abrupt benefit cuts would be arbitrary and unfair. But given baby boomers' role in sanctioning today's indifference and denial, they would be richly deserved. |
