Wednesday, July 27, 2011
The Turning Point for "Entitlement" Programs
The result of all the drama emanating from Capitol Hill and the White House has been to get a lot of people wondering about the sustainability of Social Security and Medicare/Medicaid.
Both Democrats and Republicans agree that the “debt ceiling”, the limit on how much the federal government is permitted to borrow, must be raised. It is essentially an accounting fiction because, since 1960, it has been raised 78 times; 49 times by Republican presidents and 29 times by Democrat presidents.
What makes it an issue now? $14.3 trillion dollars worth of U.S. debt.
It is not just the size of this debt, probably the greatest that any nation has ever owed in history, it is that it was initially due to a financial rescue program in 2008 when President Bush and Congress sought to avoid a collapse of Wall Street and banks. The TARP funds were eventually repaid.
Part of the current debt is due to massive spending programs by the Obama administration, allegedly to “create or save” jobs and “stimulate” the economy. They did neither.
The Obama spending programs were, in essense, Democrat slush funds parceled out to the party’s faithful to ensure that teachers and other public service workers would be retained, that General Motors and Chrysler could avoid the normal bankruptcy procedures that would have restructured both companies—and likely reduce union power, and that favored contractors could receive funding for “shovel ready projects.”
A long term, on-going problem has been the current and future debt is attributed to meeting the obligations of Social Security, introduced in 1935 by President Franklin D. Roosevelt, and to the high costs of Medicare and Medicaid. The latter became law on July 30, 1965 as an amendment to the existing Social Security legislation.
In sum, both programs reflect the Democratic Party’s commitment to “social justice” (wealth redistribution) that began in the early part of the last century. Republicans were not immune to this. President George W. Bush added to the costs of Medicare with prescription coverage.
The battle on Capital Hill is between the Democrats, led by President Obama, who wants to raise taxes in the midst of what is called a recession but is truly a Depression 2.0. Raising taxes is what President Roosevelt did and it simply prolonged the Great Depression by sucking money out of the free market economy.
On the other side of the non-negotiating table are the Republicans who, thanks to the Tea Party members of the House, have been forced to reclaim their reputation as a party devoted to limited government and prudent fiscal policies.
It is assumed by all that the debt ceiling with be lifted. It is unknown whether the nation’s credit rating of AAA will be reduced as the result of a failure to substantially cut spending and, far more importantly, meet its obligation to repay its debt. Indeed, the central issue is all about credit.
A nation that must borrow billions every day to meet its obligations cannot afford to lose a rating that is rooted in the very beginning of its history when Alexander Hamilton, the first Secretary of the Treasury, insisted that all Revolutionary War debts be paid in full.
Social Security is the largest government benefit program in the world. It represents more than 20% of the federal budget and, together with Medicare/Medicaid, they accounted for 53% of total federal outlays in Fiscal Year 2008, with net interest payments accounting for an additional 8.5%.
Here’s the rub. At the time that Social Security was created, somewhere between 10 and 14 workers were paying into the system for every recipient receiving a check. By 2010, the ratio was about 3 workers paying in for 1 taking out.
Social Security is unsustainable.
When President Roosevelt was pitching Social Security, he promised that no worker would ever pay more than 1% of their income into the system. By 2010, self-employed persons like myself were paying 15.3% of their income into Social Security and Medicare/Medicaid.
President Roosevelt promised that Social Security would be self-sustaining and that its benefits “should not come from the proceeds of general taxation.” In practice, although a “trust fund” was set up, every dollar contributed to Social Security has gone into the general revenue fund and has been spent by Congress in any manner it saw fit.
In 1935 no one expected that Americans would routinely be living into their seventies, eighties, and nineties. The age at which recipients could begin to draw benefits was 65 and that coincided with the average lifespan nearly 80 years ago. Today, men on average live to age 78 and woman outlive them by a wide margin.
In the same fashion that the House has voted to repeal Obamacare and 26 States have joined together to argue in court that it is unconstitutional, Social Security and Medicare/Medicaid have arrived at a moment in time, a turning point, when both must be dismantled—assuming of course that the Congress and White House manage to avoid a financial catastrophe for all Americans.
© Alan Caruba, 2011