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BOHANON & STYRING: Rising entitlements tab requires drastic action

November 7, 2015

Economic AnalysisPublic finance economists go crazy thinking about federal entitlements. Medicare, Medicaid and Social Security account for most of the entitlement spending, although Obamacare looms as a future contender. Two of the three biggies, Medicare and Social Security, are for the elderly.

Rapidly rising entitlement spending is already dominating the federal budget. Among the other major budget categories, defense has been squeezed perhaps past a breaking point. Interest expense on the existing $18 billion debt can only explode as the Federal Reserve’s artificial zero-interest-rate policy inevitably ends. Federal outlays for “everything else,” from the FBI to NASA, have been essentially flat—believe it or not—the last four years due to the sequester, but Congress just tossed this out the window with the recent budget deal.

Folks, this doesn’t look good. 

What really keeps the budget guys up at night are the entitlement demographics. We’re minting 10,000 new Medicare and Social Security recipients every day as 10,000 post-World War II baby boomers retire and fewer Depression and WWII-era babies exit the rolls via death. During the Depression and WWII, economic uncertainty and/or servicemen overseas depressed the birth rate. With their return and post-war prosperity, births in 1946 doubled swiftly to over 4 million and stayed there until 1964. 

Those are the seniors retiring today, and we have 16 more years of baby boomers to go.

Consider what those 10,000 do to federal spending every day. A modest estimate for each new recipient of Social Security and Medicare might be $25,000 per year. That’s $250 million more in spending, day after day, marching years into the future.

It’s frightening. And because it’s demographically driven, there isn’t much we can do about it unless we start shooting old people. Since Bohanon and Styring are either at or near that age, we don’t like that idea much.

So what to do? Obviously, we either raise taxes a bunch (bad idea), or we find ways to restrain the growth of old-age entitlements. Raising the Social Security full retirement age from 67 to at least 70 (or higher) and boosting the Medicare age up from 65 is an obvious possibility. This might be politically possible. The younger generations already have low expectations that these programs will amount to much by the time they put in their own claims.

But we have to do something dramatic. And soon.•

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Bohanon is a professor of economics at Ball State University. Styring is an economist and independent researcher. Both also blog at INforefront.com. Send comments to ibjedit@ibj.com.

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