Commentary

Letter: Entitlement Program Spending

Dear Sir,

Your editorial (“Entitlement’s run amok,” July 11, 2007) provides much needed prominence to future–oriented measures of how large the gap is between projected expenditures on entitlement programs and available future revenues under current policies. The Social Security and Medicare Trustees have been providing this information for several years, but it is always buried deep within their annual reports.

Your methods for evaluating these gargantuan numbers are not necessarily incorrect but they could be improved. Rather than compare the 75–year entitlement imbalances of $40.6 trillion with items such as annual GDP, household net worth, and so on, it would be better to compare them with the sum total of resources from which they would be paid. A standard metric is the present value of future GDP. However, as public trustee Tom Saving is fond of saying — “the government does not own the GDP.” It has never, and won’t in the future, subject all of national output to taxes. That means the imbalances are best compared with a revenue base — such as future payrolls. The present value over the next 75 years of future payrolls is estimated by the Medicare trustees to equal $335.3 trillion. That yields a “policy metric” for evaluating the size of the federal entitlement imbalance: Future payroll taxes would have to be hiked by another 12.1 percentage points ($40.6 trillion divided by $335.3 trillion equals 0.121 or 12.1 percent) immediately and permanently in order to avoid cutting entitlement and all other federal expenditures and to avoid additional debt creation. That’s almost a doubling of all payroll taxes to fix the problem through the next 75 years. It bears repeating, however, that more than one–half of total entitlement imbalances (of $90 trillion) are projected to arise after the next 75 years.

The longer we wait to rectify federal fiscal imbalances, the larger would the required percentage point increase in payroll taxes have to become to balance the government’s projected revenues and expenditures under present laws. Contrast the urgency of such a fiscal scenario with the current crop of politicians running for President — all of whom have so far been deafeningly silent on these issues. Should we and could we increases taxes to such an extent to deal with our entitlement overstretch?

Only at our peril under today’s environment of intense tax competition. And, in any case, the increased revenues are unlikely to be saved by the federal government for paying future entitlement benefits. That means the only sensible course is to reduce federal spending, especially entitlement commitments.

Jagadeesh Gokhale is a senior fellow at the Cato Institute.