Our Brewing Federal Fiscal Calamity

We can’t keep borrowing to pay for the basic operating costs of government.
by | June 21, 2012

My wife and I own a small cabin in the Missouri Ozarks. While we were there recently, I was talking with a good friend and neighbor about the federal government. This is a working-class guy who was laid off from the little factory in town a few years ago, leaving him with nothing but a pension plan worth a few thousand dollars. He was bitter and angry about the layoff. He wanted to work but felt that the company had let him go so that it could hire younger, cheaper and more malleable workers.

Since then, he has had no steady employment but gets by working odd jobs painting houses, hanging drywall and doing a little carpentry. In our conversation, one of us mentioned the word "entitlements," and he went off like a rocket. "You're damn right I'm entitled," he said. " I paid into Social Security all my life." As soon as he turns 62 in a few months, he's going to take his "retirement" and draw about $700 a month. He sees it as a godsend.

What is a godsend to my friend — an entitlement — many see as the undoing of our federal government's financial health. One person you might expect to share that view is Chuck Bowsher, former comptroller general of the United States and, at 81, a consummate Washington insider. He is deeply knowledgeable about the federal budget and very concerned about the direction of the country. In Bowsher's view, entitlements are not the main driver of the federal deficit. And, he says, it's too politically difficult to fix them in any case.

GAO entitlements chartBut while it's true that Social Security is not a major contributor to the deficit, the same cannot be said of that other huge federal entitlement program, Medicare. As this chart put out by the Government Accountability Office a few years ago shows, Medicare is a smaller share of the budget now than Social Security, but it is going to grow at a much greater rate. While Social Security essentially levels off after 2030, Medicare continues to grow into 2080.

What that GAO graph shows, despite its title, is that in the out years it is not entitlements, but interest payments that destroy the budget. By 2030, interest costs as a share of the budget begin to metastasize and soon eclipse everything else.

And the way things are going, Medicare promises to account for much of that borrowing. In a Washington Post opinion piece entitled "Clueless About Medicare," Bryan Lawrence shows how a typical American couple will receive hundreds of thousands more in Medicare benefits than what they paid in Medicare taxes over their working lives. Here again, according to Lawrence, the solution is not to change the entitlement program and rein in costs by reducing benefits or increasing taxes. Instead, he calls for health-care reform. "The good news is that this problem is fixable," he writes. "Other countries spend far less on health care and have better health outcomes."

In the case of Social Security, the obvious solution is to eliminate the cap on earnings that are taxable. My friend in Missouri has paid a stiff tax on every cent he's ever earned, while Chuck Bowsher and I and the people in charge in Washington have had a big chunk of our earnings untaxed by Social Security. I don't think we're entitled to that.

Most of the discussion about the federal deficit is about entitlements. But my friend in the Ozarks, who is not an expert on the federal budget, and Chuck Bowsher, who is, both are right that entitlements are not the real driver of the rising cost of government. The real solution is to reform health care by focusing on outcomes.

Until we get that done, we need a revenue system that covers the cost of government. Currently, 40 cents out of every dollar the federal government spends is borrowed money. You can't keep running annual deficits and borrowing without the wheels coming off. We need to stop borrowing to pay for the basic operating costs of government. Nothing else works.

Mark Funkhouser  |  Director, GOVERNING Institute
mfunkhouser@governing.com

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