Thursday, January 6, 2011

Will Baby Boomers Bankrupt America?

Role Model for Fiscal Courage?

In "Don't Spare the Boomers," Robert Samuelson decries the growing cost of entitlements, particularly expenditures on programs like Medicare and Social Security that benefit so-called "baby boomers," including Samuelson himself. (Once source defines the "baby boom" as referring to the significant uptick in births in the United States and some other Western-style democracies between the end of World War II and the mid-1950s). According to Samuelson, the Federal Government will have to raise taxes by about 50 percent of current levels over the next 15-20 years "to cover expanding old-age subsidies and existing government programs." Or, he says, the nation can continue to run huge budget deficits, piling up debt in a way that could trigger a(nother?) financial crisis.
Not surprisingly, Samuleson finds neither option --- taxes or even more deby --- palatable. Each, he says, could stultify economic growth. (And, of course, lower growth would only further reduce tax revenues, thereby making it even more difficult to find the money necessary to fund such programs.) Thus, he suggests a third approach, that is, dramatic cuts in entitlement spending. Here is a summary of his proposals:

"Social Security's eligibility ages (66 now for full benefits and 62 for reduced benefits) could be gradually raised. Benefits could be cut for wealthier retirees. At 65, new Medicare beneficiaries could pay some or all of their insurance costs until they reached eligibility for full Social Security benefits. Even then, better-off recipients could pay higher premiums. These and other changes should start soon -- in a few years once the recovery strengthens."

As Samuleson notes, Congress has already taken some baby steps in this direction, for instance, raising medicare premiums for senior citizens that earn $85,000 per year ($170,000 per year for couples), or about 5 percent of seniors. Still, he fears that political opposition by groups such as the AARP will thwart efforts to take the sort of additional steps necessary to prevent the feared explosion in entitlement spending. (Others, it should be noted, might object to such cuts for more nuanced reasons. For instance, further reducing benefits for seniors who are better off could reduce political support for such programs, thereby ultimately harming seniors of more modest means.)

Samuelson notes that such measures might seem "unfair" to senior citizens, some of whom, anyway, have planned for their retirement on the assumption that benefits would remain at their current level. (It should be noted, however, that phasing in any reforms could ameliorate any such unfairness, giving citizens in their middle age time to adjust their savings patterns, for instance, to prepare for somewhat reduced retirement benefits.) However, as Samuelson notes, fairness can be a two way street. What might seem extremely fair to senior citizens may simultaneously seem quite unfair to younger citizens who will have to "foot the bill" if entitlement programs remain unreformed. For instance, a young struggling family might justly ask why it must pay taxes or suffer the consequences of public debt to pay for health care for affluent seniors. (Note, however, that young families might feel differently about the question if, as in the 1960s, the economy was growing rapidly and thus creating economic opportunity for themselves and their children.)
Here are some additional thoughts on the very real problem Samuelson has identified.
1) The problem may be even worse than Samuelson lets on. Samuelson, after all, focuses on national entitlements; he does not discuss the exploding obligations of states, particularly the unfunded pension liabilities previously discussed on this blog.
2) There are other possible ways to deal with the problem Samuelson identifies that might not entail the sort of deep cuts that he proposes. For instance, Congress could take steps, previously identified on this blog, to reduce the underlying cost of medical care, thereby lowering the prices that doctors, hospitals and other providers charge for health care services and thus reducing Medicare expenditures. Moreover, Congress could alter immigration policy, to increase the number of productive citizens who lawfully immigrate to the United States each year, thereby increasing the taxbase.
3) Finally, it should be noted that other nations are taking some of the steps that Samuelson is advocating. For instance, President Sarkozy of France, pictured above, stood down massive protests and strikes over his plan to raise the retirement age from 60-62, and the age for full benefits from 65-67, bringing France more in line with the United States, pushing the plan through the French legislature and signing the bill into law. In 2007, Germany raised its retirement age to 67 and Greece, Britain and Portugal are also raising theirs.

Hopefully America's political leaders will show the same courage as those in Europe (!).