December 7, 2005
Entitlement Fix Not an Option for Uncle Sam
By Edwin
J. Feulner
When the federal government first sent men into space, it vowed
to bring them all home safely. "Failure is not an option,"
flight director Gene Kranz famously told mission control when
Apollo 13 was in danger.
NASA kept
its promise and brought those three men home safely. But it's
an open question whether Uncle Sam can keep another important
promise: To provide for retirees through Social Security and Medicare.
Once again, failure is "not an option," but it remains
a possibility.
Let's begin
with the more troubled Medicare. The 2005 Medicare trustees' report
estimated that providing all promised benefits in just the next
decade could require some $2.7 trillion in new tax revenues. After
that, the problem worsens. The long-term numbers are mind-boggling:
Providing
promised Medicare benefits over the next 75 years would require
$29.9 trillion in new tax revenues. And those numbers will rise
as medical science creates better and more expensive treatments.
A recent
Heritage Foundation report projected that "Raising taxes
to meet Medicare's 75-year shortfall would cost an average of
2.3 million jobs and well over $190 billion in real GDP annually
through 2015."
This is a
surefire way to end the sort of economic growth that has always
allowed the ordinary American to climb the ladder. We could be
talking about the end of the American dream. And that's the beginning.
The real financial hit comes later, with ever-more retirees on
Medicare and ever-fewer workers shelling out ever-larger amounts
in payroll taxes.
Faced with
this scenario, one might expect Congress to take action. And in
2003 lawmakers did -- by adding Part D, an open-ended prescription-drug
benefit. In one stroke, a Republican congress and a Republican
president saddled taxpayers with an additional $8.7 trillion dollars
of unfunded liabilities. Comptroller General David Walker recently
noted, "if that's not imprudent, I don't know what is."
So what would
be prudent? First, suspend Part D by at least a year in order
to determine if it should be revised or how to pay for it without
raising taxes.
Financial
conservatives in the Senate have proposed exactly that. Their
"Fiscal Watch Team Offset Package" would delay Part
D and save at least $115 billion over the next two years.
It also would
extend and make even more generous the current drug-card program
that's helping low-income seniors. This would be a reasonable
start on the road to fiscal sanity. Once we do that, we can start
truly reforming Medicare by giving recipients more health-care
plans to choose from.
Lawmakers
also need to fix Social Security. To cover all promised benefits,
Congress would have to pony up $5.7 trillion today. That's a big
hole to dig out of, but we do have a brief window of opportunity
in which to act.
Social Security
is currently taking in more than it spends and will keep doing
so until 2017. Congress should let Americans invest a portion
of their payroll taxes in personal retirement accounts (PRAs)
that they, the taxpayers, would control. That way, these surpluses
would pile up in individual accounts. Workers would be able to
invest this money in much the same way they invest their 401(k)s.
PRAs would
allow even low-income earners to build up substantial nest eggs.
And workers would actually own them. They could spend their money
as they wish, using it all to finance their golden years or conserving
some to pass on to their heirs. And because taxpayers could draw
on their own personal accounts, we'd ease the long-term demands
on traditional Social Security.
There's a
reason Medicare and Social Security are called "entitlements."
Taxpayers have made payments throughout their working lives and
believe they are entitled to collect benefits as long as they
live.
In much the
same way, employees at General Motors thought they were entitled
to benefits, including free prescription drugs for life. But the
company, facing potential bankruptcy, is now attempting to change
its benefit package.
The same
thing could happen with Medicare and Social Security. Unless lawmakers
fix these programs, future retirees might have to watch Washington
renege on, or at least reduce, its promises.
Next week,
we'll look at how to relieve some of the pressure on lawmakers
-- by reforming "K Street Conservatism."
Edwin
J. Feulner, Ph.D., is President of The
Heritage Foundation.
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