Entitlement-Reform Realities

Some conservatives are apoplectic about the prospect of abandoning the “no-tax-hike” pledge as part of entitlement reforms. They view recent proposals to establish an entitlement commission as a ploy to compromise away their closely held position on tax policy. Unfortunately, the political and economic arithmetic of entitlement shortfalls does not permit them much hope; remaining wedded to high principles and shunning compromise will only worsen their choices. They should learn from past experience and adopt a more strategic approach.

As regards entitlements, liberals have been at the helm of the economy for decades. And conservatives often furthered their opponents’ goals, most recently with the enactment of the Medicare prescription-drug program. This has allowed liberals to keep the system moving in their preferred direction: a continual expansion of entitlement and social welfare programs financed by high and growing tax burdens.

As the aphorism goes, “possession is nine-tenths of the law.” Liberals’ programs have been in operation for decades and are now supported by a large bloc of voters, making it especially difficult for conservatives to challenge or modify them. It’s quite telling that liberals are viewed as having no new ideas. But that could be because most of their ideas are already in operation.

Liberals are in a peculiar bind. Entitlement shortfalls are growing larger and threatening to undo their legacy. Social Security and Medicare trustees estimate that total entitlement shortfalls (including Medicare’s charges to general revenues) as of the end of 2005 amount to $84 trillion — $5 trillion higher than estimated in the previous year. Most of the increases arise from accruing interest.

That presents an opportunity for conservatives to revamp today’s safety-net system by introducing their own market-oriented framework, with personal Social Security accounts as the crown jewel. Unfortunately, worsening entitlement shortfalls also make adopting personal accounts more difficult each year. The closer baby boomers come to retirement age, the less likely they are to acquiesce to smaller entitlement benefits than they are currently promised in exchange for adopting personal accounts — as last year’s debate showed.

In this debate, some conservatives continue to emphasize irrelevant bits of fiscal history. For example, Peter Ferrara wrote in a June 13 column on NRO that “Federal spending has been stable at around 20 percent of GDP for over fifty years, ever since it settled down into a long-term trend after World War II.” Conservatives then excoriate the prospect of a steeply rising share of GDP going to federal spending and taxes, and argue against a “grand compromise” to resolve entitlement shortfalls.

Self-congratulatory remarks on the historical stability of current spending as a share of GDP ignore the fact that, during the last fifty years, policymaking was not about keeping the federal government’s GDP share stable. It was mostly about competing for voters by expanding and cementing entitlement benefits without regard for future consequences — a process in which conservatives played a significant role.

Now the cake of higher future taxes is in the oven, with the temperature rising rapidly. Could conservatives remove the cake and replace future tax hikes with personal accounts? As last year’s stalled Social Security debate showed, that’s unlikely. But conservatism’s high priests continue to answer this question with a “yes.” Perhaps they have a closely guarded strategy for guaranteeing overwhelming electoral success.

Could conservatives do better by agreeing to accept some of the taxes in exchange for removing the cake earlier and replacing a part of future tax increases with personal accounts? The answer of the high priests is “no,” which is puzzling given that their choices would only worsen over time.

What are the strategic tradeoffs? Three items seem relevant: First, resolving the entitlement shortfall by paring scheduled benefit growth is becoming less feasible as time passes. The large baby-boomer voting bloc would increasingly view those benefits as inviolable and would likely possess the political muscle to enforce those claims. Thus, intransigence on compromise will make higher taxes more, not less, likely.

Congressional Budget Office projections show that without any entitlement reforms, the federal government would take up 38 percent of GDP by 2050. The high priests are afraid that immediate compromise might cause the federal spending share to increase from about 20 percent of GDP to 30 percent (with the remaining 8 percent coming from reduced benefit growth). After another five years without a solution, if the CBO were to project that the federal share would grow to 45 percent of GDP by 2055, should we believe that compromise would result in a less-than-30 percent federal share (with more than 15 percent coming from reduced benefit growth)? If so, we deserve an explanation of exactly how that would work.

Second, the fact that personal Social Security accounts do not yet exist and thus cannot compete with the existing system to demonstrate their superiority is a huge disadvantage. Their absence allows liberal opponents to compare personal accounts with placing one’s retirement on a Las Vegas roulette table.

Third, if personal accounts were introduced and proved successful, they would incorporate property rights much more compelling than existing claims on Social Security benefits. Those rights on income-earning assets would also be bequeathable, unlike traditional Social Security benefits. Such rights would not only be irreversible, they would carry strong momentum for expansion as more groups clamored for access to personal accounts.

So any arguments that the advantages of introducing personal accounts are not worthy of a few early concessions on taxes appear far from credible.

Senior fellow Jagadeesh Gokhale is widely recognized as one of the nation’s leading economists.