The nation’s fiscal problems are mainly the result of the rapid growth in spending on entitlement programs. In 1972, the federal government spent 4.4 percent of the nation’s gross domestic product on Social Security, Medicare, and Medicaid. By 2011, spending on these three programs had jumped to 10.3 percent of GDP. The added spending on the “big three” entitlements–5.9 percent of GDP more in 2011 compared to 1972–exceeds the size of the entire budget for national defense.
Over the next 20 years, spending on the major entitlement programs (including the new spending from the 2010 healthcare law) is projected to continue to rise very rapidly, reaching 15.1 percent of GDP in 2030 under plausible assumptions used by the Congressional Budget Office. The historical rate of tax collection is 18.5 percent of GDP. Even assuming that were to rise, there’s no prospect of raising taxes high enough or fast enough to cover the coming entitlement spending explosion.
So the country has little choice but to pursue, and soon, serious entitlement reform to lower future spending obligations.
The best idea is to bring the cost discipline of a functioning healthcare marketplace to Medicare. Under this model, beneficiaries would choose from among competing health plan offerings. Beneficiaries selecting less-expensive options would reduce both their own costs as well as the government’s. This model has worked well to control costs in the Medicare drug benefit.
But pursuing more competition in Medicare does not preclude adopting other reforms too. Among the ideas now being discussed in budget talks between congressional leaders and the president is a rise in the Medicare eligibility age. Social Security’s normal retirement age is already moving up from age 65 to 67 over about a two-decade phase-in period, but Medicare’s eligibility remains at 65 (where it has been since the program was enacted in 1965).
Since 1965, life expectancy at age 65 has improved by 4.8 years for men and 4.7 years for women. Retirement programs such as Social Security and Medicare must be adjusted periodically to reflect changing demographic reality.
Raising the Medicare eligibility age would reduce spending by $124 billion over the next decade, according to CBO. More importantly, by 2035, Medicare spending would be 7 percent below what would occur otherwise. Over the long run, a 7 percent reduction in Medicare spending would be enough to eliminate about 10 to 15 percent of Medicare’s long-term unfunded liabilities. That’s far from the entire solution, but it’s an important first step.
James C. Capretta is a fellow at the Ethics and Public Policy Center and a visiting fellow at the American Enterprise Institute.