2007 January 07 Sunday
Will Bush And Congress Cut Old Age Entitlements Growth?

Stuart Butler of the Heritage Foundation says growth in old age retirement programs will grow the size of the US government.

The real problem is the tsunami of retirement spending about to engulf us as the Baby Boomers begin to retire over the next few years. The cost of Medicare and Social Security will surge from about 7 percent of GDP today to almost 10 percent by 2020 and to 14 percent of the entire economy by 2050, when today’s college students retire.

That is why the President’s call for confronting these unsustainable entitlements is so important. He and Congress must begin to take action now, before the problem gets worse.

Bush wasted his political capital on entitlements reform by trying to turn Social Security into a private retirement accounts program. I do not expect the Democrats in Congress to go along Bush efforts to slow the rate of growth of old age retirement entitlements.

Will the coming increase in taxes produce a taxpayer revolt that'll provide the political support needed to raise retirement ages and to make Medicare at least partially needs-based?

The President thus must also be clear that raising taxes to reduce the deficit is unacceptable. One reason for drawing this line in the sand is that insufficient tax revenue is not the problem—spending is. The new Congress is itching to spend money on new programs that its Members committed themselves to during the election. Accepting tax increases will merely finance that new spending.

Another reason is that the Bush Administration’s tax cuts only slightly slowed a long-term rise in federal taxes as a percent of the economy. Today the federal government takes about 18 percent of GDP in taxes, roughly the average for the last 50 years. Yet under current law, thanks to tax hikes enacted before Bush came into office, taxes are slated to rise to a record high of over 20 percent within a decade and to over 22 percent within 20 years. So Americans are scheduled for massive tax increases if Congress does nothing. Thanks in part to the Alternative Minimum Tax, and in part to tax bracket creep, even extending the Bush tax cuts shaves only one percentage point off this tax increase.

I predict the federal government's take on the US economy will rise because retiring baby boomers will support tax hikes to pay for their living standards and medical care. Instead we ought to gradually rase the retirement age. If we are going to live longer then we are going to have to work longer as well.

What I'd like to know: Will the growing ranks of retirees manage to get higher taxes enacted on those still working in order to pay for continued old age entitlements hand-outs at plusher levels? Or will working taxpayers get too angry at rising taxes and push back hard enough to cancel out the power of the lobby of those who near and already retired?

What I fear: Rising taxes that choke off economic growth and by doing so cut collected tax revenue, making the old age retirement financing crisis even worse. Will that happen?

Share |      By Randall Parker at 2007 January 07 09:06 PM  Economics Demographic


Comments
Sal said at January 8, 2007 6:15 AM:

My concern is that instead of just raising taxes, the feds will also print money, giving us inflation. I also have a suspicion that we will see our IRAs raided for a "one-time" tax. Hey, only the rich have those things, right? It is going to be another massive transfer of wealth from the middle class to the entitlement class. God, I hope I'm wrong. Retirement? There will be no retirement if you are under 40 today.

Dan Van Zile said at January 8, 2007 8:57 AM:

This is really a 2 part problem, The First problem is the current shortfall in retirement funding. The Second is the longterm retirement problem. The second part should be deffered for at least 35 years until we see the effect of anti aging progress and the changes it will require in our society. For the shortturn problem a One and a one and ahalf% tax increase in FICA should be passed, I think the American People will accept that. Remember a huge amount of people around 40% or more live solely on Social security benefits. The increases pain on middle class can be alleviated by adjusting the earned income tax program. This can be fought politically with Republicans advocating higher thresholds of income and Democrats advocating lower. One problem for Republicans is that the average wage earner sees no benefits to higher growth. Wage increases ahve been minimal and when factoring, medical costs negative. So dont count on "pro-growth" arguements to bail you out.

David Lajaunie said at January 9, 2007 10:36 AM:

Hmmm, let's see! Social Security and Medicare will go bankrupt because not enough money will come in to match future expenditures. Our political/military situation is rapidly deteriorating. The US is busy exporting jobs, know how and strategic business opportunities overseas a la the British in the 19th century. We have no energy plan to deal with the expected decline in low specific gravity petroleum production; we can't control our borders and currently are importing a new uneducated, potentially unassimilable underclass. What's next, Adrianople? The Sack of Washington? Where is our leadership?

P.M.Lawrence said at January 14, 2007 9:25 PM:

That's not what happened to 19th century Britain, by the way, apart from the export of know-how which couldn't really be avoided while countries like the USA weren't respecting others' intellectual property (that only changed once the USA stopped being a net gainer).

But I digress. I was going to suggest people look at an article I wrote on this issue a few years ago, in an Australian context. You might want to look at its unpublished sequel too.


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