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Manhattan Institute

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Trump's Budget Shows Peril of Surging Social Security and Medicare Costs

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Trump's Budget Shows Peril of Surging Social Security and Medicare Costs

Washington Examiner February 21, 2018
EconomicsBudgetTax

Budget deficits will likely exceed $1 trillion by next year, and reach $2 trillion within a decade.

President Trump’s latest budget proposal shows that escalating budget deficits will not be reined in until Social Security and Medicare are addressed.

First, the bad news. Budget deficits will likely exceed $1 trillion by next year, and reach $2 trillion within a decade. If interest rates rise back to even 1990s levels, then the interest costs on the enormous debt will push the budget deficit closer to $3 trillion a decade from now. And even that assumes peace and prosperity.

Such red ink is completely unsustainable. It would force large broad-based tax increases, raise interest rates on families and businesses, and deprive the economy of the investments needed for economic growth.

It is tempting to fully blame large deficits on the new tax cuts and the spending deal – which together will cost about $300 billion annually. Yet the main driver of soaring deficits is the Social Security and Medicare budget that will more than double from $1.5 trillion to $3.1 trillion over the next decade, as 74 million Baby Boomers retire. On top of that, interest on the national debt will triple to $800 billion (plus $200 billion more for every additional point interest rates rise).

Overall, Social Security and Medicare face a daunting $82 trillion cash deficit over the next 30 years. Failing to reform these programs would require either doubling all income taxes, or essentially eliminating nearly all remaining federal programs. The popular solutions are insufficient: Cutting the defense budget to European levels while doubling the 35 and 37 percent tax brackets to 70 and 74 percent would combine to close just one-third of the gap.

Yet President Trump’s budget, just like former President Barack Obama's before him, simply punts on this vital issue.

Choosing political reality over fiscal sustainability, his decision to offer only modest Medicare changes and no Social Security reforms makes balancing the budget impossible.

It also forces the president to become extraordinarily aggressive elsewhere in the budget to show meaningful deficit reduction. The budget assumes a historic tax revenue surge from economic growth, which is not guaranteed. It proposes cutting non-defense discretionary spending – which includes veterans’ health care, infrastructure, homeland security, and health research – by more than half, as a percentage of the economy. Even defense spending would fall to its lowest share of the GDP since the 1930s. Replacing Obamacare and overhauling Medicaid would save $763 billion over 10 years, and savings from other entitlements like anti-poverty programs, student loans, and farm subsidies would save $500 billion over the decade.

Even if all of these proposed budget cuts of varying plausibility were enacted, and the economy did embark on this historic growth spurt, the annual budget deficit would still settle in around $450 billion.

As the party out of power, congressional Democrats have been predictably critical of rising deficits. However, with the exception of the tax cuts, they share the blame. Senate Democrats, after threatening a filibuster, demanded and received $131 billion in additional domestic spending as part of the budget deal. More importantly, congressional Democrats have aggressively opposed proposals to close the Social Security and Medicare deficits. In fact, many Democrats are rallying around a single-payer health plan unveiled by Senator Bernie Sanders that could cost more than $30 trillion over a decade. There is no credible level of taxation that could come close to financing Social Security, Medicare, and single-payer health care.

Ultimately, neither Republicans nor Democrats have produced any realistic blueprint to address the long-term budget deficit. Obama signed legislation that collectively added $5 trillion in debt, and Trump has already added $3 trillion in projected debt (if one assumes the tax cuts and spending deals are extended). Neither party is discussing Social Security and Medicare reform.

Then again, politicians are merely following public opinion. A 2017 Pew poll revealed overwhelming bipartisan opposition to spending cuts in all 14 categories polled, with the exception of Republican support for reducing foreign aid. The same poll showed less than 10 percent of Americans support reining in Social Security and Medicare. More recent polls show large support for expanding both entitlements and discretionary spending. And yet only 6 percent of Americans would accept higher taxes to balance the budget or to pay for all of their new desired spending.

It is easy to criticize President Trump and lawmakers for surrendering to a sea of red ink. However, the ultimate blame goes to us, the voters, for electing politicians that accurately reflect our own denial of budgetary reality.

This piece originally appeared at the Washington Examiner

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Brian M. Riedl is a senior fellow at the Manhattan Institute. Previously, he worked for six years as chief economist to Senator Rob Portman (R-OH) and as staff director of the Senate Finance Subcommittee on Fiscal Responsibility and Economic Growth. Follow him on Twitter here

Photo by Win McNamee / Getty Images
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