Entitlement Reform Is Necessary for Long-Term Fiscal Stability

From Heritage.org

Attention has focused recently on the explosion of federal borrowing to meet the demands of economic "stimulus," housing market stabilization, and the financial sector crisis. However, even if the United States had been fortunate enough to avoid these crises, the federal government would still face an unsustainable fiscal course.

The most current long-term projections of growth in Social Security, Medicaid, and Medicare (often referred to as entitlements) paint a bleak fiscal picture, which emphasizes the need for reform. Left unchecked, entitlement spending is projected to exceed 20 percent of gross domestic product (GDP) by 2060. Viewed in isolation and from the distance of 50 years, this may not seem altogether daunting--distressing perhaps, but hardly alarming. However, the federal budget would also need to expand to include discretionary spending and the other mandatory outlays. Even more important, mandatory outlays would include spending a crushing 22 percent of GDP to service the debt accumulated from five decades of debt-financed federal spending. The projections beyond 2060 reflect the snowball effect of compounding debt and dwarf the nearer-term estimates. Regardless of the time horizon, addressing U.S. fiscal straits will require increasingly drastic measures.[1]

The projections demonstrate the futility of attempting to finance entitlements with debt. On its present course, this debt and the accompanying interest will swamp the U.S. economy, harm U.S. standing in world capital markets, damage capital formation and productivity growth in the United States, and reduce future standards of living.

The problem needs to be addressed soon, but some proposed solutions will not work. Raising taxes to match the growth in the spending would dramatically harm economic growth and competitiveness. Similarly, it is unrealistic to expect sustained GDP growth sufficient to afford this spending. Instead, addressing the long-term fiscal challenges confronting the United States will require fundamentally reforming entitlement spending.

This paper suggests some possible approaches that Congress should consider when it reforms entitlements to rein in spending and makes broader reforms to the health care and health insurance markets.