The Big Squeeze

July 25, 2008 • Commentary
This article appeared in the Washington Times on July 25, 2008.

Peter Orszag is no conservative ideologue. The head of the Congressional Budget Office (CBO) was a scholar at the liberal Brookings Institution before being picked for his current position by Nancy Pelosi and Harry Reid. Yet, Mr. Orszag recently warned that the rising cost of federal entitlement programs, particularly Medicare, Medicaid, and Social Security, poses a grave threat to America’s economic future.

According to Mr. Orszag, without dramatic reform, the cost of those three programs alone will rise from 18 percent of GDP today to 28 percent by the middle of this century and as much as 35 percent soon thereafter. That means that just three federal government programs will be consuming between a quarter and a third of everything this country produces. Paying for those programs would require raising both the corporate tax rate and top income tax rate from their current 35 percent to 88 percent, the current 25 percent tax rate for middle‐​income workers to 63 percent, and the 10 percent tax bracket for low‐​income workers to 25 percent. The impact on workers, businesses and the economy at large would be catastrophic.

Yet, discussion of entitlement reform has been conspicuously absent in the presidential campaign so far.

During his years in the Senate, John McCain earned a reputation as a fiscal conservative and champion of entitlement reform. But on the campaign trail this year, “straight talk” has been very hard to come by. In discussing Social Security, Mr. McCain, who once favored slowing the growth in benefits and allowing younger workers to privately invest a portion of their Social Security taxes, now speaks mostly in banalities about “reaching across the aisle” to achieve “bipartisan consensus.”

At times, he has suggested that he still favors personal accounts, recently telling CNN, “I want young workers to be able to, if they choose, to take part of their own money, which is their taxes, and put it in an account which has their name on it.” But Mr. McCain’s Web site says he supports accounts only as a “supplement” to Social Security, suggesting that he no longer would allow workers to divert part of their taxes to such accounts. His top economic adviser, Douglas Holtz‐​Eakin, says that such ambiguity is intentional. “The history on Social Security has been if you put out specific proposals or preconditions, you polarize the debate and the deal doesn’t get done,” he told the Los Angeles Times.

Barack Obama, on the other hand, has been much more straightforward about what he would do. It just wouldn’t be much. Mr. Obama has ruled out both personal accounts and any change in benefits. Instead he would raise taxes. Mr. Obama would subject income over $250,000 per year to the Social Security payroll tax. While this would be one of the biggest tax increases in American history, and would give the United States a higher marginal tax rate than Sweden, it would at best preserve Social Security’s cash‐​flow solvency by four to five years. That’s a great deal of pain for very little gain.

On Medicare, both candidates have been even less courageous. Faced with a recent split between a Republican proposal to trim reimbursements to doctors and hospitals and a Democratic plan to cut payments to private insurers participating in the Medicare Advantage program, Mr. McCain managed to oppose both sets of cuts. During the primaries, Mr. McCain called for means‐​testing Medicare’s prescription drug benefit. But lately that rhetoric has disappeared.

Meanwhile, Mr. Obama actually wants to increase Medicare spending, particularly on the program’s prescription drug benefit. And, he would also increase spending for Medicaid. That’s like trying to cram a few more passengers onto the Titanic.

Mr. McCain and Mr. Obama owe the American people an explanation of how they are going to deal with the entitlement crisis. Are they willing to cut benefits and reform these programs? Or do they think we can tax our way out of the problem? Do we really want government taking more than a third of GDP?

There is no doubt that we are currently going through some tough economic times. But the current slow‐​down is nothing compared to the economic crisis we will face if the government fails to get its financial house in order.

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