The federal government had a long-term debt problem even before the COVID-19 pandemic appeared on the radar. The public health and economic crises now engulfing the country and the world have exacerbated it in dramatic fashion. Five gradual entitlement program adjustments would constitute a sensible, initial course correction. They should be adopted by Congress after the current crisis has passed.
In January, the Congressional Budget Office (CBO) projected federal debt would exceed 100 percent of GDP in 2031 and reach 180 percent of GDP in 2050. That dire forecast is now obsolete because it is too optimistic. Congress passed four emergency spending bills in March and April to address the public health emergency and the economic crisis it precipitated. In a preliminary revision of its budget projections, released in April, CBO estimated federal debt would reach 100 percent of GDP this year and 108 percent in 2021. A longer-term forcecast is sure to show debt climbing past 180 percent of GDP well before 2050.
Now is not the right time to focus on fiscal restraint. The current emergency is far from over, and the nation’s leaders should be working to minimize its damage. That means passing additional legislation this summer to support state and local government budgets and to make it easier for Americans to stay covered with health insurance. Such a measure will be expensive and add to the deficits expected for this year and next.
The moment for recalibrating the budget is when the current emergency has receded, which may be some time from now. When it does arrive, Congress and the president should work cooperatively to prevent escalating federal debt from becoming a permanent drag on the economy’s performance.
That does not mean a policy of immediate austerity. There is no need to balance the budget in five or ten years, or ever. What’s needed is a sensible reset of spending commitments and tax burdens to narrow the gap between them over the long-term. The frame of reference should be twenty and thirty nears, not five.
Skeptics wonder what is the point of worrying about longer-term deficits and debt when the country has so many other pressing problems that demand attention. There are three responses.
First, today’s fiscal challenges are in part a result of inaction decades ago. In 1993, President Clinton agreed to appoint a bipartisan commission to address the nation’s long-term fiscal challenges, but its recommendations were not taken up by Congress. In the late 1990’s, a commission on Medicare’s future came close to finding consensus on a bipartisan reform plan, but it also fell short and failed to produce meaningful results. Those were missed opportunities that would have made today’s fiscal challenges more manageable.
Second, the nation’s fiscal problems are structural and cannot be resolved in the near term. The big spending is on entitlement programs — Social Security, Medicare, and Medicaid — upon which tens of millions of American rely for income security and health coverage. It is not possible to change how these programs operate in a matter of a few years. Further, many of the beneficiaries are retirees who have made irreversible career decisions based on current rules; it would not be fair to rewrite the social contract with them when they have no possibility of minimizing the losses they would incur. Significant reforms must be phased in, gradually, with savings building over time.
Third, forecasts of rising debt over the long run can effect economic performance even before the problem is on the doorstep. The U.S. is still viewed internationally as havig the strongest economy, and the dollar is the world’s reserve currency. But perceptions can change, and will, if the U.S. remains on course to run up debt in excess of 200 percent of GDP, which is now a real possibility. Countries get into trouble when they struggle to extract sufficient revenue from their citizens to cover current obligations and service accumulated debt. The U.S. is not at that point, but could be soon. CBO estimates debt at 150 percent of GDP would necessitate net interest payments equal to 7.2 percent of GDP in 2050. These payments would come at the expense of the immediate needs of voters, and would benefit many foreign holders of Treasury debt instruments.
The budget gap that needs closing is wide. According to CBO, the primary deficit — measured as non-interest spending in excees of revenue — will be 4.6 percent of GDP in 2050, up from 2.7 percent in 2019. Here are five steps that would go a long way toward closing it:
- Longevity Indexing in Social Security. In 1983, Congress increased the normal retirement age in Social Security from 65 to 67, on a gradual basis. The improvement in lifespans since then calls for a further adjustment. On average, men at age 65 are now living 3.8 years longer than they were in 1983. Instead of a further ad hoc increase, Congress should index the retirement age, on a prospective basis, to maintain a steady ratio of retirement to working years across generations. Once in place, this provision would automatically adjust program spending to conform with the actual lifespan experiences of retired Americans.
- Progressive Adjustments to Social Securit Benefits. Social Security already has a progessive benefit formula, but it could be made more so to provide a stronger safety net while also lowering long-term costs. Earnings in the third bracket in the benefit formula could be replaced at a 10 or 5 percent rate, on a prospective basis, instead of the 15 percent rate provided in current law. At the same time, the program could provide a higher minimum benefit payment to workers with credited wages spanning a minimum number of years (perhaps 25 or 30). The new floor might be set just above the poverty threshold to ensure Americans who have engaged in meaningful work before age 65 will have sufficient incomes in retirement to meet their basic needs.
- Personal Accounts in Social Security. The introduction of small personal accounts as a feature of Social Security could improve program solvency. One option would be to increase the combined employer-employee tax rate, now 12.4 pecent, by an additional percentage point, and then devote 2.0 percentage points of the total tax rate to funding such accounts on a prospective basis. Workers would build balances in the accounts that could be used to partially offset what they are owed under the program’s statutory formula and partially to increase the total amount of their retirement income from their Social Securty tax payments.
- Premium Support in Medicare. Medicare allows beneficiaries to access their entitlement to covered benefits through enrollment in private insurance plans, called Medicare Advantage (MA). Other beneficiaries are assigned to provider-led managed care plans, called Accountable Care Organizations (ACOs). Still other enrollees get their care through the unmanaged fee-for-service program (FFS). Medicare would be less costly if competition among these three options were strengthened. Beneficiaries should be given the choice annually to enroll in the type of coverage they find most attractive, with the government contribution set at the average cost plan in a market. Medicare beneficiaries would have an incentive to enroll in high-value, low-premium coverage because they would pay the difference between the government’s contribution and the toal premium charged by the plans they select. All of the coverage options offered in the Medicare marketplace would have an incentive to minimize their costs to remain price competitive. This reform could be applied prospectively by holding harmless current beneficiaries from premium increases above what is required under current law.
- Mandatory Managed Care for Dually Eligible Beneficiaries. The most expensive enrollees in both Medicare and Medicaid are those who are eligible for both programs. They account for roughly one in five beneficiaries but a third of program spending. Most of the dually eligible are frail elderly who have very low incomes and require long-term care assistance. The cost of caring for these beneficiaries would be less if they were enrolled in effective managed care arrangements that minimize the need for expensive nursing home stays. Congress should require better coordination of the combined Medicare-Medicaid benefit, in part by mandating that the dually eligible get their care through well-managed health plans.
Neither party is strong enough to address the nation’s growing fiscal problems on its own. A solution will require bipartisan compromise, which means tax hikes will be part of the equation. The toughest part of challenge will be finding consensus on adjustments to the major entitlement programs. The reforms offered here would be controversial, but they build on what exists and could be phased in gradually to limit the disruption they would cause to U.S. households. The alternative is to wait for the debt crisis to arrive, and then react to it. The pandemic has shown us how ill-advised this approach would be.
James C. Capretta is a Contributor at RealClearPolicy and holds the Milton Friedman Chair at the American Enterprise Institute.