Health Care and Insurance and Education & Workforce Development and Government

ECONOMIC ANALYSIS: The Great Society meets fiscal reality

April 16, 2007

Someone wise in matters of politics once said programs for the poor are poor programs. It remains true today-initiatives aimed at helping the most vulnerable in our society, be they privately or publicly funded, seem to be perpetually starved for funds. And so the genius of those who created the Social Security system-originally aimed at older Americans whose assets were devastated by the Great Depression in 1935-was to make the program available to all, regardless of income.

In a few short decades, the once-prevalent stigma of being on "the dole" by receiving government checks was replaced by a feeling of ownership and entitlement, as all but a tiny fraction of Americans bought into the idea that the checks they received-on green paper stock, not to be confused with the gold checks associated with the Supplemental Social Security program explicitly targeted at the poor-were earned through contributions paid during their working lives.

That buy-in translated into broad political support for both Social Security and its close cousin-the Medicare program, instituted in 1965-that continues to this day. As a result, these are not poor programs, by any stretch of the imagination. More than 42 million people received some of the $900 billion in old-age survivors insurance, disability insurance and Medicare funds dispensed in fiscal 2006.

But the genius of design that helped these programs achieve such broad-based support also contained the seed of their demise, because their growth has changed the nature of government. In terms of dollars, the single most important task of federal government today is to transfer dollars from those of working age to those who have retired. No other activity-be it defense, education, or roads and parks-even comes close.

And the commitment to do the same for the decades to come has implications that are astonishing.

We seem to be slow to wake up to that fact. Yet the man whose office oversees all that spending has begun to notice. "Fiscal cancer" was the term recently used by the nation's chief accountant, Comptroller General David Walker, to describe the growing imbalance between entitlement spending commitments and the funds set aside to meet them.

The analogy is apt. Like a dysfunctional organism, growth in the future liabilities for publicly funded health care entitlements in particular have been super-fueled as three powerful trends come together: increased longevity, the growing number of baby boomer retirees, and the higher utilization rates of ever more complex and expensive health care technologies that have made total costs rise two or three times the rate of inflation.

The result is that the unfunded liability for the Medicare program alone-the amount of funds we would have to collect and set aside today to pay for the deficits that loom ahead-is now five times larger than Social Security.

The irony is that it could be the social welfare programs that are rich and those unlucky enough to be working and hence taxed to pay for them who will be poor. For if nothing is done to fundamentally rewrite the premise of these universal entitlements, we will need to raise taxes-on our children and grandchildren-to rates more typical of those seen in Europe.

Part of that reworking has to come back to the idea of providing for those in need. Programs for the poor, if you will. Whether or not you think it makes sense to tax the first dollar of a high school kid's paycheck-as our current payroll taxes do-to help pay for the prostate screening exam of a wealthy Miami Beach retiree, the fact is that collectively as a society we will soon be unable to afford to do so.



Barkey is a research economist at Ball State University. His column appears weekly. He can be reached by e-mail at pbarkey@ibj.com.
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