In just five years, a demographic tidal wave will begin that will forever alter the federal government. The large baby boom generation will start retiring and cause the costs of Social Security and Medicare to explode. Unfortunately, Congress seems blissfully unaware of the coming crisis as it works to create another elderly entitlement in the form of a $400 billion Medicare prescription drug benefit.
Ironically, many in Congress support an expansion of elderly entitlements, but also claim to be champions of childrens' interests as well. But children, as tomorrow's taxpayers, will be the losers as the costs of unreformed elderly programs balloon. Even before a new drug benefit is added, Social Security, Medicare, and Medicaid spending will almost double as a share of gross domestic product by 2040. Federal spending will be pushed up from 19.9 percent of GDP to at least 27.1 percent. That 36 percent expansion in government's share of Americans' income will come at the expense of today's children when they become middle-aged taxpayers.
Suppose that such a government expansion were thrust onto taxpayers today. It would amount to a $778 billion annual tax increase -- that's more than seven times the size of President Bush's income tax rate cuts. But even that is an optimistic scenario if Congress continues to add new spending programs to the federal empire. Congress loves new programs because they provide talking points for pandering politicians.
The new drug program is a case in point. It makes no budget sense to create a new elderly entitlement because of the large federal deficit and the looming financial crisis in Medicare. If Medicare were truly reformed with drug costs offset one-for-one with cuts elsewhere, it would make sense. But if Congress simply dishes out more taxpayer money, gray-haired voters will be empowered to demand even more from presidential campaigners next year.
The fiscal problems faced by young Americans in the future will be exacerbated by out-of-control discretionary spending. Even aside from defense spending, discretionary spending has grown at 8.2 percent a year over the past five years. If it continues growing at that rate, it will swallow a growing share of the nation's resources since nominal GDP is expected to grow at just 5 percent a year in coming years. In that case, a 36 percent expansion in government by 2040 looks optimistic unless Congress gets serious by spending cuts.
If young Americans want to enjoy the same economic freedom and prosperity that the baby boomers have enjoyed, they will have to pressure Congress to cut both elderly programs and spending in general. There is no shortage of ideas for sensible reforms. For discretionary spending, programs such as education, housing, and highways should be terminated, privatized, or transferred to the states. Such cuts sound radical today, but they won't a decade from now when escalating entitlement costs are putting a squeeze on every other part of the budget.
For Medicare, beneficiary premiums should be increased as costs rise over time, rather than the added costs being foisted on working people through higher taxes. After all, the elderly are much better off compared to the young than they used to be. For example, the average elderly person used to consume less than the average young person, but the reverse is true today. Indeed, research has found that, on average, a majority of the elderly's income today is financed by the young through government transfers. A new drug subsidy will make those intergenerational transfers worse.
Tax-funded entitlement programs sounded like a good idea to many when initiated. But they have set up a "war between the generations" in the 21st century. At the signing ceremony for the new Medicare program in 1965, Lyndon Johnson said that "no longer will young families see their own incomes, and their own hopes, eaten away simply because they are carrying out their deep moral obligations" to provide for their parents. Yet young families will see their hopes eaten away in the future from taxes to pay for elderly entitlements unless they are reformed.