8/8/2019 The Entitlement Crisis

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The Entitlement Crisis

heritage.org/solutions

Entitlements

Entitlements are one o the greatest domestic challenges the nation aces. This product is part o the EntitlementsInitiative, one o 10 trans ormational initiatives in our Leadership or America campaign.

THE ISSUE:

Entitlements—Social Security, Medicare, and Medicaid—threaten to bankrupt the nation. The unsustainable tsunamio spending on these programs will accelerate as 77 millionbaby boomers food into them. Unlike other parts o the

ederal budget, such as de ense or most education pro-

grams, Congress does not review and approve the level ounding or these programs annually or…ever. Rather, their

expansion is on autopilot, ueled by demographic changesand rapidly rising health care costs. We are reaching a bud-getary tipping point as entitlement spending’s automatic“ rst call” crowds out other national priorities. Recentstudies show that America’s long-term scal situation isone o the world’s worst, which makes re orms even moreurgent i we are to avoid the ate o Greece or even Britain.But entitlements are also a moral challenge. It is simplywrong to make unsustainable promises to today’s adults byshackling our children and grandchildren with crippling debtor heavy taxes.

THE FACTS:

• Ever-Higher Spending. Without re orms, these pro-grams will more than double the historical average o

ederal spending rom 20% o the economy to nearly50% in just two generations.

• Lack of Budget Control. The United States is the onlymajor country that does not subject these programs toreal budgets and budget control.

• Doubling Taxes. Raising taxes to pay or these uncon-trolled promises is not an option. Congress would haveto double ederal Income tax rates on the next genera-tion and continue to raise taxes in a utile attempt tokeep up with spending.

• New Revenue, New Spending. Even i higher taxeswere thought to be part o the solution, the experienceo Obamacare and previous programs demonstrates thatnew revenue simply encourages new spending.

• Mortgaging Our Future. U.S. debt exceeds $13 trillion,but we would have to take out the equivalent o a mort-

gage o $63 trillion to cover the uture debt costs othese entitlements. Each person’s share o that hiddenmortgage now exceeds $200,000 .

THE SOLUTIONS:

• Tell Us the Truth and Fix the Way Congress SpendsOur Money. First and oremost, the age o entitle-ments must end. Rather than allow these programs tobankrupt us on autopilot, Congress should set rm anden orceable budget caps or Medicare, Medicaid, andSocial Security. Put these programs on a rm, long-termbudget—say 30 years—and require Congress to reviewthese budgets regularly. Triggers or other mechanisms should be deployed to en orce budget limits i Congress

ails to act. Entitlement obligations should be disclosedprominently in the annual budget resolution. Be oreenacting major new policy changes, Congress shouldshow their true costs by considering the long-term bud-getary implications. Today, Congress looks only at the

rst 10 years. When lawmakers do pass re orms, savingsshould be banked rather than spent on other programs.

• Fix Medicare. Establish a new Medicare “de ned

contribution” system as we transition away romtoday’s costly and ine cient ee- or-service system.This means deciding as a nation how much we wantto spend instead o today’s open-ended promises.New retirees, just like ederal workers, would receive

Vol. 3 – August 17, 2010

8/8/2019 The Entitlement Crisis

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Solutions for America is a product of Heritage’s Leadership for America campaign. Our mission is to formulate and promote conservative publi based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong national defen

a government contribution to purchase the health insur-ance that best meets their needs. The contribution, or“premium assistance,” would be capped but reviewedperiodically. An individual’s contribution would be adjusted

according to income and underlying medical condition.• Fix Medicaid. The current system is una ordable,

imposes huge costs and un unded mandates on states,and is poorly suited to the needs o patients or doctors.Healthier amilies should be allowed into private healthinsurance with their share o Medicaid money. We needpatient-centered care to give the disabled, elderly, andtheir amilies a say in the care and services they receive.Medicaid’s long-term care bene t must be trans ormed

rom an open-ended entitlement to an insurance-basedmodel o private coverage as part o a general strategy to

boost long-term care insurance.• Fix Social Security. To boost savings, we need to

include a system o voluntary personal accounts withinSocial Security. The system as a whole should be madesolvent by trans orming the remainder o Social Security

to “real insurance,” ocusing bene ts on those who reallyneed them during retirement while strengthening thesa ety net or poorer retirees. As Americans live longerproductive lives, the retirement age should be raised and

indexed to uture increases in longevity. Incentives suchas removing payroll taxes or workers over the retirementage should accompany these changes. Another impor-tant step is to improve the indexation o past earningsused to calculate Social Security bene ts and establish-ing a more realistic cost-o -living adjustment that betterrefects changes in a retiree’s cost o living.

• Increase Retirement Savings. Automatic enrollment,whereby workers are automatically enrolled in employer-sponsored retirement savings but allowed to opt out,should be expanded, and automatic IRA, a simple payroll

deduction system that small businesses would o er toemployees, should be created. Workers should be en-couraged to include annuity-like products, which ensurethat they will not outlive their savings, in their retirementplans.

heritage.orgCongressional Budget Office.Source:

PERCENTAGE OF GDP

If future taxes are held at the historical average, spending on Medicare, Medicaid, and Social Security will consumeall revenues by 2052. Because entitlement spending is funded on autopilot, no revenue will be left to pay for othergovernment spending, including constitutional functions such as defense.

Entitlements Will Consume All Tax Revenues by 2052

0

1965 1975 1985 1995 2005 2015 2025 2035 2045 2055 2065 2075 2083

5%

10%

15%

20%

25%

Medicare

Medicaid

2052: Entitlements 18.2% of GDP

2.7%

24.0%

SocialSecurity

30-Year Average TaxRevenue: 18.2%

TaxRevenue

30-Year Aver age TaxRevenue: 18.2%

TaxRevenue

6

Entitlements Will Consume All Tax Revenues by 2052