Mr. President: We do have a spending problem

House Speaker John Boehner reports that in his closed-door budget negotiations, President Obama said at one point, "We don't have a spending problem."

Seriously?

An updated  chart from my book on the American health economy reaches quite the opposite conclusion. Unless we more than triple current payroll tax rates, spending on entitlements-the lion's share of which are health-related-will outpace available revenues before the end of the 21st century.

The current combined payroll tax for Social Security (12.4%) and Medicare (2.9%) is 15.3%.[1]  Yet by 2090, the projected shortfall in entitlements (i.e., the gap between projected revenues for such programs and actual spending under current policy) is likely to be more than twice as large as the current payroll tax bite.  Paying for these programs with current revenues (rather than racking up a large debt to be paid by our children and grandchildren) would require a tax increase equivalent to tripling current payroll tax levels.

This analysis is based on official U.S. government sources such as the Congressional Budget Office and Social Security actuaries. I am using projections based on current policy (the so-called alternative fiscal scenario) since both the CBO and Medicare actuary have signaled that this is a more realistic, expected path for spending and revenue than the current law.[2] However, even if I repeat the same analysis using the current law's projections of revenues and spending, unfunded liabilities for entitlements still would still be short by  16.2 percent of taxable payroll by 2090.

That is, even the "best case" scenario-that Obamacare works exactly as advertised-would still require a doubling of payroll taxes (or its revenue equivalent) to avert chronic deficits in entitlement spending.

I am not proposing that all of these programs be financed through payroll taxes. I have expressed the gap relative to taxable payroll simply to provide a metric with which everyone is familiar. Every worker knows how much payroll tax is currently deducted from their paychecks, and can envision how tripling those taxes would impact their income.

Readers can decide for themselves whether the president is fooling us or just himself when he claims we have no spending problem. I can only speak for myself in stating that I have no interest in seeing my payroll taxes doubled or tripled to pay for these entitlements. But, I would be astonished if the general public were willing to tolerate the punishing tax burdens implied by these dismal figures. And the tsunami of red ink that will be generated over the next 75 years cannot possibly be financed simply by higher taxes on the rich.

Let's hope that in the next round of negotiations, responsible members of Congress hold out for significant reforms that will address the spending side of our entitlements mess. Kicking the can down the road is morally reprehensible when we know our children and grandchildren will be left holding the bag if we fail.

 

Footnotes

[1] Note that workers see only half these amounts taken from their paychecks because the "employer share" is paid separately. However, economists generally agree that workers ultimately bear the cost of the employer share through lower wages.

[2] The CBO and Medicare actuary have signaled the "alternative fiscal scenario" assumptions are a more realistic, expected path for spending and revenue than the current law. The current law baseline is especially unrealistic for projecting health spending since it assumes draconian cuts to Medicare that will create massive access problems for Medicare beneficiaries. For more than a decade, Congress has postponed cuts in Medicare payment rates to doctors precisely due to concerns about what these cuts will do to beneficiary access to care. Indeed, the fiscal cliff deal also included extending the "doc fix" for another year. It is unrealistic to presume that Congress will stop extending the "doc fix" in the decades to come or  that, when faced with similar circumstances, it wouldn't  avert the drastic reductions in payment rates to hospitals and other institutional providers mandated by Obamacare.

 

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Christopher J.
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