Business

Entitlements: A Collision Course With Fiscal Reality

Our major federal entitlement programs operate as pay-as-you-go systems—the payroll taxes of today’s workers are transferred to current beneficiaries. While there were roughly 40 workers for every beneficiary in the 1940s, today there are just three. That number will only decrease as the Boomer generation retires. Longer lifespans, combined with retirement ages that have hardly budged in 50 years, make the fiscal outlook worse. Entitlements already account for about two-thirds of all federal spending, not including interest on the debt issued to pay for them. Something will have to give—means testing, raising the retirement age, or taxes, or a combination of those and other measures. How should we reform these programs for long-term sustainability?

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Entitlements
Image source: YouTube Video Screenshot

Moderator

Josh Barro - Senior Editor, Business Insider

Speakers

Jared Bernstein - Economic Policy Fellow, Milken Institute; Senior Fellow, Center on Budget and Policy Priorities; Former Chief Economist to Vice President Joe Biden

Andrew Biggs - Resident Scholar, American Enterprise Institute

Maya MacGuineas - President, Committee for a Responsible Federal Budget; Head of the Campaign to Fix the Debt

Entitlements: A Collision Course With Fiscal Reality

Transcript

I guess we'll take away side words entitlements collision and all the things that people might not like but there I was just thinking when you were giving an intro that so much of this discussion is probably more of a values discussion. What do you think that these programs should look like. How do we want to have our resources spread in this country. And those are issues where there is no right and wrong. You wouldn't know that from how it feels in D.C. where everything that one person says is right and it's wrong to somebody else. But those are values choices. I do think we have a huge problem in our Social Security and Medicare programs in that we have promised more in benefits than we have on track to come into the program. So there's not enough revenues that's coming into the program to pay the promised benefits. And to me however you want to fix that whether it's all by cutting promised benefits whether it's by raising taxes by some combination of those and throw things like raising the retirement age and there we should be doing something because the thing that we shouldn't be doing is having promised people benefits that we have no plan how to pay for it. So I don't know if you want to use the word collision. I know there's some questions about the word entitlement but I think we have things that are actuarially sound. I was once dial tested and someone said never say actuarially unsound likable person but which like kind of a beat. I didn't know I was being dial test. It's just a mean trick.

But the trust funds will run out of resources. And the problem is that our policymakers use these programs as punching bags. They fight so much over them instead of figuring out let's debate how we're going to fix them. But I think we should be able to agree that you need to set them up so that they are actuarially sound so Jared I think you would agree with all of that. Right. Yeah I would add a couple of unlikable part. Yeah I totally reject the unlikable part. As super likable. Yeah I would I would. I know this but just to flesh out a nuance that I think is important though the trust fund is slated to expire by 2034 that doesn't mean Social Security stops paying benefits. In fact the incoming tax base supports benefits to the tune of about 75 percent of current benefits. Now I consider that to be an avoidable tragedy that we should avoid. But I did want to make clear that sometimes it is cast not by myself is cast as you know things are going to end at that point. So you know I wouldn't call that a collision by any stretch of the imagination. I think of a collision as something that's unavoidable it's going to happen any minute. If you don't do it you need to do. But no question the debate.

I like my framing in terms of values but at some point in the in resolving the fiscal gaps that we're talking about we're going to have to come up with some combination in my view of of of revenue increases and perhaps some benefit cutbacks particularly at the very top of the scale that that's going to that's going to have to be the formula. I will say my my last comment just as part of an introduction is that while there may have been not momentum because it's Washington at least some consensus among sort of center left of center right that that was going to have to be the solution to the entitlement challenge. That's kind of been blown out of the water by the tax plan. The tax plan to my great dismay has really thrown a wrench in what in our ability to come together and solve this in a meaningful way I'll be happy to talk about why I think that's the case. But I'm pretty sure that's the political reality. So actually can we bring up slide 2. I'm going to call for Jared slide at this point. So I don't want to get too much into the weeds on this panel on like specific tinkering formulas to what we might do. But just I want to give this sort of sense of scale because I think you know so Security and Medicare being the biggest slices of Medicare has all these unknowns about the future track of health care costs is very complicated. Social Security is fairly simple. It's you know there's money comes in and money goes out. You change the rules around that you can always make the math add up. So what is the. Can you just talk a little bit about what the nature of these things are that you might do. Sure. I'm glad you raised that because that's why I put the slide in here.

So the the the shortfall the. I'm not going to say actuary. They just said it the actuarial shortfall 1 percent of GDP over 75 years which by the way is really worth keeping in mind. The way CBO talks about it's 1 percent over 10 years and I have to tell you that's about the cost of the tax cut. Each one of these each one of these bars tells you how much of that actuarial gap would be closed by for example raising the payroll tax rate. I'm sure you can't read the.