Heading Off the Entitlement Meltdown

Demography is destiny: The retirement of 77 million baby boomers is not a theoretical projection.

wsjThis year’s budget deficit of “only” $500 billion has brought some complacency on federal spending and deficits. It shouldn’t. The Congressional Budget Office’s long-term budget outlook released on July 15 shows a $40 trillion increase in debt over the next two decades.

While a $500 billion deficit is welcome compared with the $1.4 trillion peak in 2009, the decline is temporary. The CBO’s other, more realistic “alternative baseline,” which assumes Congress continues current policies, projects new debt of $10 trillion over the next decade, followed by $100 trillion over the subsequent two decades. Consequently, the CBO simply stops calculating the national debt after 36 years. Apparently its models cannot conceive of a functioning economy.

And that’s the rosy scenario: It assumes no more recessions, wars, terrorist attacks or natural catastrophes, and that interest costs on the national debt will be permanently held down by near-record low interest rates; also that certain ObamaCare price controls widely derided as unrealistic will continue forever.

What drives this long-term debt? It’s not falling tax revenues. After averaging 17.3% of the economy over the past 50 years, revenues, the CBO assumes, will level off at 18% of the economy within a decade—with a separate, more detailed estimate showing revenues climbing an additional 1% of the economy each subsequent decade. That estimate shows a typical middle-class family’s income-tax burden nearly doubling over the next 25 years. Unfortunately, even these soaring tax receipts cannot keep up with surging spending.

After averaging 20% of the economy over the past 50 years, spending is projected by the CBO to jump to 23%, 29%, and then 34% of the economy over the next three decades—at which point the CBO simply stops counting. All of the rising deficit will come from spending increases (rather than revenue declines), and nearly all of that spending will come from Social Security, health entitlements and the resulting interest costs on the swelling national debt.

Each day, 10,000 baby boomers retire and begin receiving Medicare and Social Security benefits. And while five workers supported the benefits of each retiree in 1960, there will be only two workers funding each retiree by 2030.

Those who dismiss long-term budget projections should re-read the last paragraph. The retirement of 77 million baby boomers into Social Security and Medicare is not a theoretical projection. Demography is destiny.

While Social Security’s Old Age program faces bankruptcy in 20 years, Medicare is in even worse shape because (in addition to demographics) it must also deal with rising health-care costs. Thus, the typical couple retiring next year will have paid approximately $140,000 in lifetime Medicare taxes and premiums, yet will receive nearly $430,000 in Medicare benefits. Multiply that by 77 million retiring baby boomers, and it’s clear that Medicare is unsustainable.

ObamaCare is also driving spending upward. According to the CBO, over the next decade, ObamaCare will be the single largest driver of rising health-care spending. To avoid fiscal and economic calamity, Washington must do the following:

First, get the economy moving. During this weakest economic recovery since the 1940s, three people have abandoned the workforce for every net job created. As long as the economy continues to perform $700 billion below its optimal level, with falling incomes and millions more jobless, there will be less income to tax. Economic growth not only creates jobs and raises incomes, it also adds tax revenue.

To get the economy moving, we will have to enact comprehensive tax reform to simplify the tax code, encourage more domestic energy exploration, replace ObamaCare with patient-centered health care, expand exports through new free trade agreements, and limit Washington red tape.

Second, the government must avoid large tax increases. Drowning our children in taxes is no better than drowning them in debt to pay our retirement benefits.

Third, reform Social Security and health entitlements. The CBO estimates that a deal saving $4 trillion over the decade would put the budget on a path to sustainability. Adjusting Social Security and Medicare’s retirement ages, means-testing benefits for upper-income retirees, and supporting broad-based, patient-centered health care can not only help close the debt, it can also create a stronger economy.

Today’s declining deficit is temporary, and the longer we wait to enact reforms, the more abrupt and painful they will be. It is time for everyone to come together and start to erase the red ink.

Mr. Portman, a Republican, is a U.S. senator from Ohio.

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