Alter: Why Entitlement Reforms Are Essential

Friday at 11:59 PM, sequestration officially began, triggering sharp across-the-board cuts without much progress on bipartisan replacement plan. Our current debt path is unsustainable and we need to address the deficit, so sequestration is better than nothing even if it is poor policy. But it doesn't address the future drivers of federal spending: entitlement programs.

President Obama Friday called for a balanced approach to put our deficits on a downward trajectory as a share of the economy. Given projections of our debt, Bloomberg View columnist Jonathan Alter argues that even the strongest supporters of entitlement programs should consider reform to strengthen these programs going forward. He argues that reform, contrary to the popular rhetoric, should make these programs sustainable within the context of the budget while ensuring a good return from these programs. The current approach of sequestration hits the discretionary budget too hard, and will reduce government investment and research that will help with our future growth prospects. He writes:

To hold the line on harmful cuts to discretionary spending, Obama and the Democrats must educate the public about the necessity of entitlement reform. Otherwise, the poor and needy -- largely spared by the automatic reductions under sequestration -- will get hit much harder down the road.

Liberals are right to reject Republican proposals that would slash social-welfare programs even as they refuse to consider closing tax loopholes for the wealthy. And I agree that the sequestration will cut into the bone of important government functions and investments in the future.

That makes two more reasons to start talking seriously about how we will pay for the insanely expensive retirement of the baby boomers.

How expensive? Anyone reaching retirement age in the next 20 years (including me) will take more than three times as much out of Medicare as he or she contributed in taxes. By 2030, the U.S. will have twice as many retirees as in 1995, and Social Security and Medicare alone will consume half of the federal budget, with the other half going almost entirely to defense and interest on the national debt. It’s unsustainable.

An approach that doesn't consider any reforms will make it difficult to move forward. Alter uses the example of Social Security, due to become insolvent as soon as 2033, at which point beneficiaries will experience an automatic 25 percent cut in benefits. There are many combinations of reforms that could make Social Security solvent, but once lawmakers start leaving options off the table, agreeing upon a solution becomes difficult.

Today, only the first $110,000 in income is subject to the 7.65 percent tax that pays for Social Security and Medicare. Lifting the cap to higher income levels (say $250,000 or $400,000) could eventually generate hundreds of billions of dollars.

Republicans consider this a tax increase. That’s only true outside the context of these programs. The change could be structured so that no one paid in more than actuarial tables say they would take out. That would still raise billions and be consistent with the idea of paying for your own retirement if you can afford it.

For lifting the cap to have any chance, it would have to be matched by reforms such as adopting the chained consumer-price index, a new way to measure cost-of-living adjustments that Obama apparently favors. Liberals oppose chained CPI because it would theoretically result in lower benefits. But less frequent cost-of-living increases aren’t the same as cuts, especially if the current system is, as many experts believe, based on an inaccurate assessment of inflation.

Indeed, CRFB has discussed a number of ways for tacking the rising costs of entitlements. For Social Security, we have talked about switching to the chained CPI to accurately measure for inflation since it better accounts for consumer substitution among similar goods. For Medicare and Social Security, we have discussed raising the eligibility age. Not everyone will agree with all of the reforms out there, but there are enough good ideas that we should start discussing. If we want to avoid the sharp cuts under sequestration, we should put everything on the table. As Alter concludes, "Maybe there are better ideas for reforming social insurance. The point is, we better start talking about them."

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