Fat years and lean years — don't be too enthusiastic about tax cuts
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In the Bible, Joseph told Pharaoh to save during the seven fat years to support society during the seven lean years.

This story is worth remembering now that the Trump administration is proposing a new round of tax cuts in an effort to stimulate economic growth. It is also worth remembering that this tax-cut approach was tried in the 1980s, and led to increases in the federal deficit.

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Baby boomers were in their 20s and 30s during the Reagan years, and could look ahead to years of economic growth in the private sector. Today, those same baby boomers — now in their late 50s to early 70s — are joining Medicare at a rate of 5,000 people a day. They need to carefully consider the inevitable transition to retirement and the future financing of such public sector programs as Medicare and Social Security.

 

The proposed tax cuts come at an interesting time from a fiscal policy perspective. We have just recovered from the financial crisis of a decade ago, which we survived largely through massive deficit spending. While the budget is not yet in balance, the deficit, according to the Congressional Budget Office, is down to $559 billion, or 2.9 percent of GDP. That is the good news.

However, our economic outlook is not good — by 2025, the deficit is expected to climb to $1.2 trillion, or 4.5 percent of GDP, and will continue to grow. These projections reflect the increasing burden of Medicare and Social Security on the economy. The growth of the deficit is already projected to push public borrowing to the highest levels since WWII.

Before you get enthusiastic about tax cuts, you might consider a brief civics lesson on federal spending. There are two types of federal spending: discretionary and mandatory. These terms are confusing, but they represent two entirely distinct ways that the federal government spends money.

Our annual budget battles, like the minor one this week, are around discretionary spending. Technically, the discretionary budget describes funds the federal government cannot spend without Congressional action. This includes support for the Department of Defense for our wars and military equipment, as well as most of the activities and services provided by the federal government — from keeping the lights on at the Statue of Liberty to homeland security to funding the latest scientific advancements through the National Institutes of Health.

The vast majority of federal spending, however, is mandatory spending. This is money the government will spend without any action on the part of Congress, and includes paying for Medicare, Social Security, the federal portion of Medicaid and a variety of income security programs for the poor.

Interest on our $15 trillion federal debt is also generally considered as mandatory spending. In 2017, 69 percent of federal spending was mandatory spending; by 2025, that number will rise to 75 percent, as the costs of Social Security, Medicare and interest on the federal debt grow as baby boomers age.

What all this means is that while politicians on both sides of the aisle assure seniors that they paid into Medicare and they will get their benefits, the reality is that this is not the case. Medicare payroll taxes support only Medicare hospital insurance, not medical insurance or drug coverage, the two fastest-growing parts of Medicare.

In reality, Medicare will require $542 billion in subsidies in 2025. In other words, unfunded parts of Medicare will account for almost half of the federal deficit. That means Medicare will be the target of deficit hawks in Washington, especially if the world’s demand for U.S. government debt softens and interest rates spike.

What will happen to mandatory spending and Medicare? And what will happen to the 70 percent of seniors who only have Social Security to support themselves? This isn’t an issue for our billionaire cabinet, but is a huge issue for the rest of us.

The baby boom generation should carefully consider the parable of Joseph as they evaluate new proposals from Washington to feast during the last of the fat years.

Kevin Schulman, MD, is a professor of medicine at Duke University, and a visiting scholar at Harvard Business School.


The views of contributors are their own and are not the views of The Hill.