War between the Generations: Federal Spending on the Elderly Set to Explode

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At the signing ceremony for the new Medicareprogram in 1965, President Lyndon Johnson said,“No longer will young families see their own incomes,and their own hopes, eaten away simply because theyare carrying out their deep moral obligations to theirparents.” But taxes to support growth in Medicareand Social Security will severely eat away at youngpeople’s income in coming years unless those programsundergo fundamental reforms.

In the 20th century politicians replaced personalsavings, family obligations, and private charitieswith giant centralized transfer systems tosupport the elderly. The main programs for theelderly, Social Security and Medicare, are primarilyfunded by taxes on the young. That fundingmechanism has set the nation on a financial collisioncourse as the number of elderly will soar 116percent by 2040 while the number of workers supportingthem will grow just 22 percent. Withoutreforms, the combined cost of Social Security andMedicare Part A is expected to rise from 13.8 percentof taxable wages today to 24.2 percent by2040. Adding in projected spending on Part B ofMedicare pushes up the total projected costs ofthe two programs to 30 percent of wages by 2040.

Congress is considering making the loomingfiscal crisis much worse with a costly and unfundedprescription drug program. But increasing thealready high transfers from the young to the old isneither economically sound nor fair. Considerthat, on average, the elderly used to consume lessthan the young, but now they consume more.Also, the elderly today are in better physical shapeand better able to earn income to support themselvesthan before. Major entitlement reforms areneeded to reduce taxpayer costs and head off agenerational war between the old and the young.

A wide range of reforms is needed to deal withrising entitlement costs. Social Security and Medicareshould be turned into savings‐​based systemswith payroll contributions funding personalhealth care and retirement accounts. Taxes on savingshould be sharply reduced so that Americanscan put more money aside for their own future.Medicare reforms should reduce health care costsby increasing competition and relying more onout‐​of‐​pocket payments. Centralized redistributionsystems for the elderly need to be replaced bypersonal savings and greater individual responsibilityfor retirement in the new century.

Chris Edwards and Tad DeHaven

Chris Edwards is director of fiscal policy studies and Tad DeHaven is a research assistant at the Cato Institute.