2004 January 12 Monday
Robert J. Samuelson On The Coming Federal Spending Expansion

Robert J. Samuelson argues that even Congressional Budget Office projections for future federal budget growth underestimate the future growth of US federal spending to pay for more retirees.

In 2002 total federal spending (except interest on the debt) was 17.8 percent of GDP. Under one CBO projection, that increases almost two-fifths, to 24.5 percent of GDP, by 2030. Another projection shows an increase of only a sixth, to 20.8 percent of GDP. The main difference between the two projections involves assumptions about higher health costs, but unfortunately both projections may be optimistic. Why? Well, the CBO offsets some of the higher spending for the elderly by assuming modest reductions in other federal spending as a share of GDP from 2002 levels.

Under both projections, defense spending declines to its lowest share of GDP since 1940. And then there's the rest of government: homeland security, national parks, health research, school aid, highways, food stamps, meat inspections -- and much more. This spending also drops as a share of GDP.

In the face of this worsening economic picture for the federal budget the Rino (Republican In Name Only) Republicans passed a Medicare drug benefit bill (see Medicare Drug Benefit: A Strange Sort Of Republican Victory) that will cost $110 billion per year by 2030 and probably even more since Congress will likely increase the size of the benefit in future years.

If the government takes a larger percentage of the GDP then of course the economy will not grow as rapidly and therefore the government will not collect an amount of money that will scale up as tax rates increase. This will further increase the burden that falls on workers because their gross incomes will be lower than would have been the case had the economy grown faster. At the same time they will face higher taxes and hence less take-home pay. But as the taxes rise the opposition to tax increases will rise as well. This will translate into increasing support for raising the minimum age for eligibility for Social Security and Medicare.

Research aimed at developing techniques to slow the rate of aging could help to deal with the economic problem of an aging population. If people could stay youthful enough to work for more years then they could spend more years as taxpayers rather than living of the taxes of those still working.

Another idea for trying to increase the ratio of workers to retirees would be to accelerate the education of the young in order to get them into the labor market sooner to start paying taxes sooner. For more on this proposal see my previous post: Accelerate Education To Increase Tax Revenue, Reduce Costs.

Another policy area that ought to be changed to make the burden of the elderly more bearable would be to reduce the influx of immigrants who are so low skilled that they earn low salaries, pay little in taxes, and use far more in government services than they pay in taxes. Reduce that burden on government and there will be more money available to pay for the elderly. But instead of moving to raise the average skill level requirement for immigrants our very lousy President George W. Bush is trying to grant work amnesties in his quest to get more Hispanic voters for his own personal reelection and to win support from rich people who want cheap domestic servants and gardeners. America has some serious problems and would benefit from wise leadership from a serious President. It is really a shame that we have a Bush instead.

Share |      By Randall Parker at 2004 January 12 10:40 PM  Economics Demographic

Mike Trier said at January 13, 2004 6:04 PM:

Dear Mr. Parker,

What is your view of the recent Medical Savings Account legislation passed in conjunction with the prescription drug benefit? This was featured over at Zonitics with the brief comment that it might have positive impacts which will offset the new entitlement cost. I am a budget analyst at a large community college system and am very interested in any possible solution which might lessen the impact of expected 15-22% increase in medical insurance premiums. We are also seeking incentives which will encourage retirement eligible individuals from 60-65 to retire. Many seem reluctant to retire with insurance benefits and costs in doubt. Do you think combinations of MSA's, catastrophic medical insurances and cash supplements could make retirement attractive for these folks? I think it is possible to craft programs to minimize risks over the period until Medicare kicks in. What do you think the implications would be of a large scale shift from traditional health care insurance to these types of plans? If medical inflation could be reduced to single digits it would have a huge impact on federal and state budget.

Randall Parker said at January 13, 2004 6:30 PM:


First of all, I think MSAs are a good idea, and not just for retirees. One of the biggest sources of distortion in the medical market is that most people are not the direct purchasers of the bulk of the medical treatment they receive. They get medical benefits from their employer which pays an insurance company which, in turn, pays doctors, hospitals, and so on. Cutting back the number of middle layers will make the market more efficient.

Also, the provision of medical insurance to people as employees results in a growing number of uninsured. Some do not get insurance thru their jobs. Some are between jobs. Some are self-employed. These people pay for medical insurance in post-tax dollars. Worse, the unemployed have to start paying just as they lose their jobs. This is dumb. We ought to be able to save up money in pre-tax form while employed or to buy multi-year insurance while employed where all the premiums are paid up front but where the coverage lasts for years.

But I expect the costs of medical insurance to continue to increase more rapidly than inflation in large part because more treatments are constantly developed. Go back 40 years and it was really cheap to treat cancer because nothing could be done about it. There were not fancy tests or therapies. So it was hard to spend much. But people want more care even if it costs more.

As for the reluctance of people to retire: I hope their financial fears keep them in the workforce longer. We can't afford to have lots of people retiring in their 50s and 60s. We need them working and paying taxes and getting treated for medical conditions with employer-provided medical insurance or with their own money. I think tax laws should be changed to take away incentives for companies to offer early buy-outs for long term employees. Keep them working longer.

One source of increased medical costs for everyone is the rising number of uninsured. Part of the costs of the uninsured end of getting paid by government spending and part by shifting of costs that drive up prices on the insured. One source of that rise is immigration. Hispanics are medically uninsured at two and a half times the rate of whites. This happens because of the low educational levels of Hispanic immigrants. We could reduce the rate of medical uninsurance by changing immigration policy in all sorts of ways in order to keep out the less skilled.

Fly said at January 16, 2004 3:07 PM:

”But I expect the costs of medical insurance to continue to increase more rapidly than inflation in large part because more treatments are constantly developed. Go back 40 years and it was really cheap to treat cancer because nothing could be done about it. There were not fancy tests or therapies. So it was hard to spend much. But people want more care even if it costs more.”

I agree that’s how we got here. The main cost today is medical problems that can’t be cured, only managed. As biotech improves I expect the costs to rise as expensive real cures appear. Then to fall as the technology matures and the population of chronic patients shrinks. In a few decades the medical cost for seniors might be no more than for young adults. Medicare costs might even decline. (Retirement rules would need adjustment, as young workers would object to supporting long-lived retirees. With good mental and physical health I think many elders would happily continue working at least part-time.)

I don’t expect the percent of GDP spent on health to decline. More and more people will opt for enhanced health. As with cosmetic surgery there shouldn’t be a need for insurance companies or the government to foot the bill for enhancements. (Consider the dental industry where the cost for filling cavities and pulling teeth has declined but people pay more to have straight, white teeth.)

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