November 19, 2005
Drug Benefit Needs a Year On Sidelines
By Edwin
J. Feulner
"Promises
are like babies," the saying goes. "Easy to make, hard to deliver."
And when it comes to government entitlements, our elected leaders
in Washington may soon find out just how hard. Because there's
no way they can deliver everything we've been promised.
Begin with
Social Security.
In 2017,
it will begin spending more in benefits than it collects in taxes.
Some will say this shouldn't be a problem: Social Security has
been rolling up hefty surpluses lately and will continue doing
so for another 12 years. Surely it can tap this fund to keep providing
benefits, the way a retiree can tap his 401(k) when he stops working.
Unfortunately,
while we're talking about hundreds of billions of "surplus" dollars,
there's no real money there. To cover all promised benefits, Congress
would have to pony up $5.7 trillion today. That's what the government
would have to have on hand to save and invest in order to pay
Social Security's promised benefits between 2017 and 2080 and
pay back the trust fund.
Social Security
isn't even the biggest entitlement on the horizon. Medicare will
become a far bigger problem even sooner. A recent study from The
Heritage Foundation found that "providing promised Medicare benefits
is projected to require more than $2.7 trillion (in nominal dollars)
in new tax revenues over just the next 10 years and a mind-boggling
$29.9 trillion (in 2005 dollars) over the next 75 years."
To cover
Washington's promised entitlements, we would have to double today's
tax rates. The rest of the government would need to make do with
what's left over.
Meanwhile,
with the baby-boom generation retiring, there will be ever-fewer
employees supporting ever-more retirees. We're on the cusp of
a massive, government-enforced transfer of income from working
Americans to retirees, most of whom are relatively well off.
Remember
that when Social Security was created in 1935, the retirement
age was set above the average male life expectancy. Social Security
benefits were intended only to help those who "outlived" their
savings. Luckily, that's changed. People live longer, and future
generations can expect to do even better. But that means ever
more retirees depending on ever fewer workers. There were 42 workers
for each retiree in 1945. Today there are only 3.3. And by 2025,
the ratio will drop to about two workers per retiree.
In the 1930s,
the payroll tax was just 2 percent of income. Now it's 12.4 percent.
Today, the average male worker nearing retirement will get just
a 1.27 percent return on his lifetime of taxes.
Congress
must do something to fix this. But when lawmakers have acted on
entitlements, they've made the long-term problems worse.
In 2003,
they saddled Medicare with an ill-advised prescription-drug benefit.
It's expected to cost some $724 billion in its first decade, and
it was completely unnecessary: Three quarters of retirees already
have some form of drug coverage.
It would
have made more sense to target the benefit to those who really
needed it, by extending the prescription-drug card program launched
in 2004.
Instead,
lawmakers drafted a one-size-fits-all, universal entitlement,
saddling an already struggling Medicare program with hundreds
of billions of dollars in new liabilities. Unless this benefit
is suspended, many retirees will start losing their private drug
coverage next year.
Fixing the
entitlement problem will require us to think hard about transforming
Medicare, Medicaid and Social Security.
Lawmakers
should consider requiring Americans to save or buy insurance for
their retirement needs so we can focus federal help only on those
who really need it. At the same time, we should find ways to keep
benefits from getting out of control.
It would
make sense, as President Bush has proposed, to promise fewer benefits
to middle- and upper-income Americans, who depend much less on
Social Security for their retirement. Yes, that will mean Warren
Buffet loses his Social Security, and Bill Gates never gets his
promised prescription-drug benefit. But we must bring the government's
entitlement promises closer to the reality of its revenues if
we're going to protect and even improve the benefits of lower-income
Americans.
On a more
practical and immediate level, it's critical to suspend the new
drug benefit for a year, while we figure out what structural changes
to make. We've got huge financial commitments under today's programs.
Next week, I'll look at the possible consequences of not instituting
major reforms.
Edwin
J. Feulner, Ph.D., is President of The
Heritage Foundation.
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