January 31, 2006

State of the Union Address and Entitlement Spending:
Time is on Their Side

Filed under: Economy,Soc. Sec. & Retirement,Taxes & Government — Tom @ 3:30 pm

(Moved to the top for the rest of today
because of tonight’s State of the Union speech)

In the midst of a few days of enthusiasm about the current economy, I indicated at this post in late December that there were things to worry about. I would explain why in January.

Well it’s January 31, so I’d better get to it.

The simple explanation is that I have serious doubts about whether this country is up to the task of fixing Medicare and Social Security. Both of these programs, however well-intentioned, have created future obligations of nightmarish proportions that have been pushed onto future generations, and they get worse with each passing day — which, unfortunately, is just fine with the people defending the status quo.

A Christian Science Monitor article last week that received way too little notice explains why, and echoes what I have said previously about these runaway programs, except that writer Patrick Chisholm thinks we’re too far gone:

Triumph of the redistributionist left
Even with Republicans in control, trends are decidedly in favor of massive redistribution of wealth.

The political left in America is emerging victorious.

….. It’s about something much deeper; namely, that the era of big government is far from over. Trends are decidedly in favor of that quintessential leftist goal: massive redistribution of wealth.

….. While the left did not get its way on tax cuts, this may be only a temporary defeat: Freewheeling spending has made future tax cuts politically a lot harder.

….. Discretionary spending is dwarfed by mandatory spending – spending that cannot be changed without changing the laws. Shifting demographics combined with an inability to change those laws virtually ensures that, through programs such as Social Security and Medicare, America’s workers will be forced to redistribute a larger and larger portion of their income to other Americans in the coming decades.

….. Time is on the side of the left. As politically difficult as it is now to reform Social Security or Medicare, as the years pass it will get even more difficult. The swelling number of retirees will further strengthen the senior lobby. And as Social Security’s surplus evaporates, there will be less money available with which to establish personal savings accounts.

The prescription drug benefit was another victory for the redistributionists. While it is true that the left wants even more spent on that program, Republican efforts have netted an additional $1.2 trillion being redistributed over the next 10 years.

….. The left has a powerful institutional force on its side: “public choice” economics. Our system of government is highly responsive to vocal groups that lobby for subsidies, government programs, and other special favors. Since the costs are spread out among all taxpayers while the benefits are concentrated among smaller segments of the population (such as retirees, in the case of Social Security and Medicare), the taxpayers have much less of an incentive to lobby against the measure while the beneficiaries have a huge incentive to lobby for it. Whenever those subsidies are threatened, the lobbies launch their barrages of politically effective complaints.

Forces favoring the left are virtually locked in. Even with Republicans in control, big government is destined to get a lot bigger.

This all sounds like something I said back in August about Social Security, but I had a little more hope:

Those who oppose individual accounts know that if they run out the clock for something like 5-10 years, it will become very difficult financially to pull off the transition. It’s sad but true: These people would rather have the elderly depend on the ability and willingness of future generations to finance part or all of their retirement than give them full control over their financial destiny.

I get the sense now that the window of opportunity is closer to 5 years.

Individually controlled Social Security investment accounts and comprehensive Medicare reforms can stop the bleeding and return financial control to the generations that follow us. Stick with the current systems, and in less than 10 years we’ll become the upside-down place that Germany is today, with pension and healthcare obligations so overwhelming that the economy our children and grandchildren have to live in will be stuck in the mud.

I believe that part of the reason the financial markets have not performed as expected during the prosperity of the past 3 years is a sense that we are not going to get a grip on these twin monsters. After last year’s not-serious-enough attempt to sell Social Security reform, where the administration did not even produce a plan of its own, I can see why pessimism abounds.

This brings us to the State of the Union address tonight. Mr. Bush has many critical issues to cover, but after the War on Terror, controlling entitlement spending for the long-term has to be second in importance.

One of the main reasons I started this blog almost a year ago was my belief that 2005 was going to be the year Social Security reform would become a reality; in fact, my very first official post was on Social Security. Was I ever wrong.

Now Mr. Bush is down to two remaining chances to fix Social Security and Medicare on his watch, namely this year and next (2008? Dream on). He can either nibble at the edges this year, show tangible progress, use it as a springboard for 2006 midterm election success, and pass major reforms in 2007, or go for the home run this year.

Which is better? It’s up to him to decide, and then to convince us why his choice is right. Saying little and merely “seizing a political opportunity” if it comes in the next two years, as Fred Barnes suggests Mr. Bush will do in today’s OpinionJournal.com column (requires free registration), is not a viable option — not when time is NOT on your side.

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