Ryan’s retirement won’t end the entitlement debate

Ryan’s retirement won’t end the entitlement debate

The announcement by House Speaker Paul Ryan (R-Wis.) that he will not seek re-election later this year means entitlement reform will lose its most important recent champion, but it doesn’t mean the idea of reform is now dead for good. Basic math and fiscal reality are what make changes to these programs all but inevitable.

The federal government’s finances are now in a disastrous state, and the situation will get much worse in the years ahead.

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The Congressional Budget Office (CBO) projects the federal government will run a cumulative deficit of $12.4 trillion over the next decade, pushing total federal debt up to $28.7 trillion, or 96 percent of GDP, at the end of 2028. Federal debt was 39 percent of GDP at the end of 2008.

 

The primary cause of both current budgetary pressure and the deterioration that will occur over the coming decades is the rapid growth in entitlement spending. The federal budget is now dominated by expenditures on federal benefit programs.

In 1970, the federal government spent 5.8 percent of GDP on entitlements. By 2017, entitlement spending had grown to 13.1 percent of GDP. As the population ages and health-care costs continue to rise more rapidly than economic growth, entitlement spending will surge in coming years.

In 2040, federal spending on Social Security, Medicare, Medicaid and the subsidies provided in the Affordable Care Act will be 3.9 percentage points of GDP higher than it was in 2017. Left unchecked, entitlement spending will consume nearly all federal revenue by the middle of the century. 

Further, both Social Security and Medicare are financed by federal trust funds that will not have sufficient resources to pay full benefits in the coming years. The Social Security trust funds are projected to be depleted of reserves in 2034, while the Medicare hospital insurance trust fund is expected to run out of funding in 2029.

Once the trust funds are depleted, incoming revenue will be insufficient to finance full benefits, which means there will need to be cuts in benefits paid to retirees. The prospect of across-the-board benefit cuts is certain to force some action in Congress eventually.

While changes in entitlement programs are inevitable, they may not occur soon or be pursued sensibly. At the moment, serious reform is a non-starter politically.

President TrumpDonald John TrumpGrassley: Dems 'withheld information' on new Kavanaugh allegation Health advocates decry funding transfer over migrant children Groups plan mass walkout in support of Kavanaugh accuser MORE has no interest in pursuing anything controversial with respect to the big middle-class entitlements, Social Security and Medicare, and most Democrats seem to think the nation’s budgetary problems can be solved with tax increases alone. So, for the time being, nothing will be done — unless a crisis forces Congress to act. 

Unfortunately, a crisis cannot be ruled out. As deficits and debt have piled up, the possibility of a federal debt crisis has risen too. Any number of different events, such as an international conflict or a trade war or the bursting of a global asset bubble, could make it more difficult for the federal government to borrow at preferential rates.

If interest rates were to jump precipitously, so too would the federal government’s payments to its creditors, which might force Congress to pass legislation to prevent deficits from spiraling out of control.

Under this kind of scenario, Congress would have little choice but to raise taxes sharply and to cut spending quickly too, probably including immediate cuts in entitlement spending. 

That’s not the ideal way to implement reform. Imposing deep cuts without advance warning would leave no time for program beneficiaries to make adjustments in their financial plans.

It would be far better if Congress passed legislation before a crisis hit to phase-in adjustments in program spending over many years. Current Social Security and Medicare beneficiaries could be exempt from the changes, as could those nearing retirement. The goal should be to lower spending on these programs over 10, 20 and 30 years, not immediately.

Done right, entitlement reform could strengthen the safety net rather than weaken it. Social Security’s benefit structure leaves many millions of workers who had short careers and low wages with meager retirement benefits.

The program could be modified to improve protection for low-wage workers while providing less generous benefits for higher-income workers. Social Security’s benefit formula could also be calibrated to adjust automatically to compensate for longer lifespans.

In Medicare, the federal government should move to a system of fixed, defined contributions in support of insurance enrollment by program beneficiaries (often called “premium support”), as Ryan has long recommended.

This change would promote competition, and cut costs, according to CBO. The program should also provide higher subsidies to retirees with low lifetime earnings and reduced subsidies for retirees who earned higher-than-average wages when working.

With these changes, Social Security and Medicare would become more financially sustainable while also providing better protection for retirees with very low incomes.

Paul RyanPaul Davis RyanDems see Kavanaugh saga as playing to their advantage How does the 25th Amendment work? Sinema, Fitzpatrick call for long-term extension of Violence Against Women Act MORE understands entitlement reform better than anyone else in Congress. He studied the issue for years, and, despite what his critics now say, he was effective at convincing his colleagues of the issue’s importance and thus making actual change a more likely prospect.

Changing Social Security and Medicare is never going to be a popular exercise, but Ryan made the case consistently anyway, and for that he deserves much credit. His voice will be missed, but even after he is gone, the case for entitlement reform will intensify.

Federal debt is set to soar in coming years, and it will not be possible to slow down government borrowing if the largest spending programs in the budget are off-limits for all sensible adjustments. 

James C. Capretta is a resident fellow at the American Enterprise Institute.