With a new Congress and president taking office this month and a high-profile government streamlining commission being convened, there is wide speculation about fresh approaches to tackling the federal government’s daunting fiscal imbalance.
However, the same realities that confronted past policymakers confront the new ones. Any lasting fiscal reforms must moderate the growth of the largest mandatory spending programs: Social Security, Medicare and Medicaid.
This reality is not a product of anyone’s ideology or party affiliation but of unavoidable math. Such reforms are required for the simple reason that each program’s status quo is untenable.
Partisans mislead voters by claiming their opponents seek to gut programs like Social Security and Medicare out of ideological hostility. Nothing could be further from the truth. No politician benefits from attacking these popular programs, which will continue growing no matter which party holds the majority.
Behind the scenes, responsible lawmakers understand that these programs’ current autopilot growth rates far exceed that of national economic growth.
Under current projections, over the first four decades of the 21st century, Social Security and the major federal health programs (Medicare, Medicaid and the Affordable Care Act) will have grown from absorbing 36 percent of federal tax collections to 73 percent. Their explosive growth not only drives mounting federal deficits but also squeezes out other important national priorities.
Though the three programs have unsustainable growth in common, each faces distinct challenges.
Social Security mostly requires reforms for its own sake, apart from its budgetary effects. Its financing shortfall has already grown to equal roughly 25 percent of all future benefit claims, and its combined trust funds are on pace to be depleted in a decade. If corrective actions are put off until that time approaches, even eliminating all new benefit claims would not avert insolvency.
This matters enormously to Social Security’s participants, because the critical feature that has always made its benefits more reliable than welfare has been that workers fund them with their payroll tax contributions. If lawmakers prove unwilling to balance Social Security’s books, this principle will have to be abandoned. Social Security would henceforth be subject to the persistent benefit renegotiations that occur in welfare programs financed from the government’s general fund.
Medicare requires reforms for the simple reason that it’s the leading driver of federal deficits. The budget cannot be stabilized unless Medicare spending growth is moderated.
The Congressional Budget Office doesn’t mince words: “Outlays are large by historical standards, and they generally rise over the 2024-2054 period, reaching 27.3 percent of GDP in 2054. Rising interest costs and spending for the major health care programs, particularly Medicare, drive that growth.”
Medicare’s cost growth not only threatens the federal fiscal outlook but results in greater burdens for premium-paying beneficiaries, payroll tax-paying workers and income taxpayers, who finance three quarters of Medicare spending on benefits ranging from physician services to prescription drugs.
Finally, Medicaid contributes greatly to rising deficits because its cost growth rate exceeds sustainable rates and, unlike Social Security and Medicare, it collects no payroll taxes. Whereas Social Security is administratively efficient, Medicaid is afflicted by swelling improper payments and administrative cost rates much higher than Medicare Fee-for-Service.
Medicaid’s problems reflect its skewed financial incentives, under which states decide whom to cover but pass the majority of the bill to the federal government. These problems are worse with the ACA’s Medicaid expansion population, for whom the federal government reimburses states for 90 percent of costs. This arrangement is incompatible with prudent fiscal stewardship.
Lawmakers should be both realistic and compassionate when reforming these programs. They must be realistic in setting future growth rates that can actually be maintained. They should be compassionate in protecting current benefit levels while sparing beleaguered taxpayers the pain of increasingly serving the government’s insatiable appetite for spending.
Fortunately, this can be done. For example, in Social Security, maintaining current benefits while having future benefits simply grow with price inflation would eliminate the preponderance of its financing shortfall.
Historians may someday puzzle over the U.S. government’s continuing failure to correct these problems. Obviously, our largest programs cannot perpetually grow faster than national economic output, a problem that’s better fixed sooner rather than later. Why has it not yet been done? Reasons include both the benign and the cynical.
The benign reason is that Americans strongly support these programs’ benefits. The cynicism comes from opportunistic politicians who refer to any moderation of spending growth as “cuts,” deliberately fostering public misapprehensions that benefits would be reduced from current levels rather than simply growing more reasonably in the future.
We will know that federal lawmakers are finally serious about stabilizing the fiscal outlook when they pivot from politically alluring quests, like attacking government bureaucracy and taxing billionaires, to confronting the politically treacherous phenomena that really matter: namely, the explosive growth of Medicare, Medicaid and Social Security.
Charles Blahous is the J. Fish and Lillian F. Smith Chair and senior research strategist at the Mercatus Center at George Mason University.
