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President's plan for entitlement spending misses mark
The numbers in President Obama’s proposed budget are staggering, but the lack of reform is even more staggering. The president is proposing a fourth consecutive year of deficits in excess of $1 trillion. In 2012, spending will exceed 24 percent of GDP, well above the historical average of 20 percent, and the deficit will reach 8.5 percent of GDP.
Gross federal government debt will increase from $15.4 trillion today to $25.9 trillion in 2022. In 2022, we will be spending almost as much on interest ($850 billion) as we will on Medicare ($908 billion).
However, the deficits won’t be the result of low taxes. In fact, the president is proposing a 10-year net tax increase of more than $1.5 trillion that will increase federal tax burdens to 20.1 percent of GDP in 2022, significantly above the historical average of 18 percent, and the budget will still be out of balance.
When the president says he’s going to stick it to the rich, which he defines as households making more than $250,000 per year, he really means it. Not only is he proposing to raise the top rate from 35 percent to 39.6 percent, he’ll reduce the dollar amount of itemized deductions high income taxpayers can claim AND reduce the rate at which these itemized deductions reduce taxable income. But he doesn’t stop there. He proposes raising tax rates on dividends and capital gains for high income households, raising taxes on oil and gas companies and companies that use LIFO, and the list goes on.
In 2011, these three entitlements, after offsetting receipts, accounted for 41 percent of total federal spending. By 2022, these entitlements will account for 49 percent of total federal spending. As a percent of GDP, spending on these three programs will increase from 9.8 percent in 2011 to 11.2 percent in 2022.
Beyond 2022, it gets even worse.
Of the major entitlements, Social Security is the easiest to reform, and the president can’t even propose a reform of this program. Even a two-term Congressman from Utah like me can come up with a viable reform proposal. Last November, I proposed a seven-point Social Security reform that achieves permanent annual balance by 2051, achieves actuarial balance for the next 75 years, and avoids tax increases and trust fund insolvency. Total Social Security benefits would continue to grow, but at a slower rate. The vast majority of retirees, particularly those with average or below average lifetime earnings, would receive a larger check than they are getting today. Some retirees with very low income would get an even larger check than they would receive under the status quo. Using current benefits as a baseline and adjusting these benefits for inflation, middle and lower income retirees in future years will get essentially the same or better benefit than current retirees.
My reform proposal contains several provisions that have been discussed for years such as increasing the normal retirement age, implementing progressive price indexing beginning at the 50th percentile, increasing the number of computation years, and using chained-CPI to calculate annual COLAs. My proposal includes three provisions that have not received a lot of attention.
Two of them, indexing the special minimum benefit to wages instead of inflation and increasing benefits by 5 percent for those reach their 85th birthday, help our most vulnerable retirees. The final provision implements an annual means test that would reduce benefits on those with incomes in excess of $120,000 in the most recent tax year. Means testing is a lot better than raising taxes. The complete details of my proposal can be found on my website.
Entitlement reform will not have an immediate impact on the budget since everyone agrees that reform would leave benefits for existing retirees largely untouched, but we have to start now because the problem gets worse the longer we wait.
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