Monday, April 15, 2013

The Liberal Case for Entitlement Reform


(This is a belated repost of something I wrote on my Forbes blog last week.)
As expected, the President's Budget proposed modest cuts in Social Security benefits. Liberals were incensed. When the proposal was first leaked, Stephanie Taylor of the Progressive Change Campaign Committee expressed the left wing’s angst, and a threat:
‘You can’t call yourself a Democrat and support Social Security benefit cuts. The president is proposing to steal thousands of dollars from grandparents and veterans by cutting cost-of-living adjustments, and any congressional Democrat who votes for such a plan should be ready for a primary challenge.’
The specific proposal to “steal thousands of dollars from grandparents” would basically cut a few tenths of a percent off the annual adjustment to Social Security Benefits (and many other revenue and outlay programs) by replacing the standard inflation measure with an alternative called the “chain-weighted Consumer Price Index (CPI).” Unlike Classic CPI, the new measure accounts for the fact that when prices rise unevenly, consumers will substitute cheaper items for those whose prices rise. As a result, the real burden of inflation is less than measured by the static CPI market basket. Most economists think this version is a better overall measure of the true cost of living.
Former Obama Budget Director Peter Orszag argues that the adjustment is likely to be modest–amounting to about a two percent cut for an 85-year-old beneficiary (and less for younger recipients). For an average retiree, this would be less than $400 per year at current benefit levels. Others think the difference would be larger—as much as $1,100 (or 6.5 percent of benefits).
The proposal could create real hardship for poor elderly Social Security recipients, as the President acknowledges.  He promises other reforms to protect the most vulnerable. One option would be to increase the minimum benefit for older retirees.
Some argue that older people’s cost of living grows faster than the overall CPI because health care costs rise disproportionately with age. Thus, the chained CPI may be moving in the wrong direction.
But the troubling thing to me is the argument that Democrats should never support cuts in Social Security benefits. Progressives also have resisted major cuts to Medicare and Medicaid as a matter of principle. This is extremely short-sighted. As most people who follow the numbers understand, spending on federal health care programs and Social Security is on an unsustainable trajectory. Progressives might want to raise taxes on “the rich” to pay for all the benefits promised under the current system, but unless spending abates, tax hikes on the well-heeled are extremely unlikely to suffice.
Entitlement spending could increase by 5% of GDP over the next 25 years. (Source: CBO)
The Congressional Budget Office projects that spending on Social Security, Medicare, Medicaid, and Exchange Subsidies will grow by more than 5 percent of GDP over the next 25 years. That is more than half of income tax revenues in a good year (and about 70 percent of revenues in recent years). To raise that kind of revenue, we would need to tax more than just the rich. And given that historical tax receipts have varied in a narrow band, there is no evidence that voters would support tax increases anywhere near large enough to pay for rising entitlement spending.
So what happens if we can’t tax our way out of the problem? The answer, as former President Clinton might say, is “arithmetic.”  If entitlement spending increases by 5 percent of GDP (the equivalent of $800 billion per year at current levels), revenues increase only modestly, and we have tapped out our borrowing capacity, what then happens to all the other things that progressives care about, like education, the environment, social welfare programs, transportation, research, and infrastructure?
The knee-jerk answer is: cut defense. There’s certainly a lot of pork in the defense budget, but total defense spending is less than the projected increase in entitlement spending. We might be able to trim defense spending, but unless we can significantly cut entitlement spending, we are looking at an unprecedented squeeze in spending on other programs–one that will make the recent cuts due to the sequester and the fiscal cliff deal look like the good old days by comparison.
And if we continue to ignore the basic arithmetic and accumulate debt even after the economy has recovered, the resultant crisis could necessitate draconian cuts in public programs. This is an outcome that no progressive would wish for.
Another advantage of cutting entitlements is that the cuts would initially be very small and only grow over time. That means that such cuts would not threaten our fragile economic recovery—unlike the harsh sequester cuts that took effect in January.
If we want to protect a robust social safety net and other vital government services, we need to come up with sensible cuts to entitlement programs that protect the most vulnerable. The President’s proposal may not be the best approach, but he was right to start the conversation. Instead of lobbing hand grenades, Democrats should engage in the debate.
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