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March 26, 2010

Why America Must Cut or Eliminate Entitlements Programs

The debate over health care reform is now officially approaching the surreal. Unfazed by dangerously extremist questions like, "Can we actually pay for these programs?", our President and Congress have just "solved" the problem of three massive (and massively insolvent) entitlement programs - Social Security, Medicare, Medicaid - by (pick one):

a. Assessing the shortfall and raising taxes to make these programs solvent.
b. Assessing the shortfall and combining tax increases with spending cuts to make these programs solvent.
c. Ignoring the shortfall and passing a fourth massive entitlement program.
d. Ignoring the shortfall, passing a fourth massive entitlement program, and calling anyone who dares to point out the risk a dangerous right wingnut extremist.

If you answered "a" or "b", congratulations. Your ability to ignore what happens in the real world is exceeded only by that of our President and Democratic members of Congress. When ordinary Americans buy things we can't pay for, we're irresponsible deadbeats who get reported to collection agencies. When Congress buys things it can't pay for, it's called "progress". Historic progress. Yesterday we were reminded that even "progress" sometimes has unpleasant consequences:

This is the canary in the coal mine; if Social Security's finances are in trouble, Medicare's will also be looking worse. While I was at the Kauffman Foundation's economics blogger forum last Friday, a show of hands indicated that about 80% of the people there thought America would have a serious fiscal crisis in the next two decades.

As this chart suggests, econobloggers are right to be concerned. Both Medicare and Social Security are already in the red. But more importantly, Medicare and Social Security went into the red sooner than the "experts" predicted:

Medicare_&_Social_Security_Deficits_Chart.png

That's not surprising. Historically, estimates of entitlement spending have a poor track record for accuracy. Not only have the "experts" been wrong repeatedly. They've repeatedly been wrong by several orders of magnitude:

cost_overruns.jpg

The chart above is based upon figures from this article. It shows the huge discrepancy between CBO estimates of the cost of new entitlement programs (the red line at 100% on the chart) and their actual costs as implemented (the blue bars). Note that with the sole exception of the Prescription Drug bill, every single health care entitlement passed by Congress has grossly exceeded its original estimated cost.

Every single one. This sobering fact hasn't stopped Barack Obama from astounding feats of chicanery with regard to the estimated (read "before reality proves us wrong") cost of reform:

In reality, if you strip out all the gimmicks and budgetary games and rework the calculus, a wholly different picture emerges: The health care reform legislation would raise, not lower, federal deficits, by $562 billion.

Gimmick No. 1 is the way the bill front-loads revenues and backloads spending. That is, the taxes and fees it calls for are set to begin immediately, but its new subsidies would be deferred so that the first 10 years of revenue would be used to pay for only 6 years of spending.

Even worse, some costs are left out entirely. To operate the new programs over the first 10 years, future Congresses would need to vote for $114 billion in additional annual spending. But this so-called discretionary spending is excluded from the Congressional Budget Office’s tabulation.

Consider, too, the fate of the $70 billion in premiums expected to be raised in the first 10 years for the legislation’s new long-term health care insurance program. This money is counted as deficit reduction, but the benefits it is intended to finance are assumed not to materialize in the first 10 years, so they appear nowhere in the cost of the legislation.


Only in Washington could $70 billion dollars worth of premiums that will have to be paid out be counted as "deficit reduction".

When confronted with the astonishing disconnect between what our government has promised us and their actual ability to pay for it, supporters of health care reform offer one of two replies:

1. "If we got rid of the Defense Department, the problem would go away."
2. "Don't be silly. Europe has offered its citizens health care for decades and they're not in trouble."

The facts don't support either argument.

DEFENSE SPENDING

The "Ooh! Let's cut defense spending" argument is convincing only to those who never bother to ask whether the proposed cuts would solve the problem of insolvent entitlement programs? What would happen if we completely eliminated the Department of Defense? This is a proposal so extreme as to be ludicrous, but let's examine it anyway as a "best case scenario". First, let's look at changes in defense spending over the past 70 years as a percentage of GDP:

Defense_hist.jpg

Now let's look at entitlement spending:

entitlement_history.jpg

Can you identify the difference between these two historic trends? Congress can't either - and apparently neither can supporters of health care reform. The difference in funding is no accident, though. Defense spending is responsive to national priorities because it is discretionary spending subject to annual review by Congress. Unlike mandatory spending items like Social Security, Medicare and Medicaid, the Pentagon must justify itself each year if it wishes to receive funding. Social Security, on the other hand, was designed to be permanent from the get go. It was also designed to pay for itself:

The old-age insurance system introduced in the Social Security Act was designed, at a public policy level, to be a contributory social insurance program in which contributions were made by workers to what was called the "old age reserve account," with the clear idea that this account would then be the source of monies to fund the workers' retirement. Actuarial studies were done to determine what the contribution rate would need to be in order to have sufficient reserves in the account to pay anticipated benefits. In the popular understanding of the program, the contributions established an "earned right" to the eventual benefits. President Roosevelt strenuously objected to any attempt to introduce general revenue funding into the program. His famous quote on the importance of the payroll taxes was: "We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program."

With Social Security in the red, it's clear that once again the best projections of the "experts" have proved overly optimistic. Still, let's consider just the best case scenario and ignore those annoying consequences. If we were to disarm tomorrow, would the threat of armed conflict disappear? These countries clearly don't think so:

defense_spending_global.jpg

How many democracies do you see on that list? How many nations that have even the most rudimentary respect for human rights? Still, let's say we completely eliminated our military from the budget. How much of the current budget (FY 2010) goes to defense vs. entitlements?

federalpie.jpg

The takeaways:

1. Defense spending is only half of entitlement spending.
2. Entitlement spending - before a 4th health care entitlement is added - already costs as much as "Everything Else" the federal government does.

"Solutions" like eliminating the most trusted institution in America regardless of whether doing so would make entitlements solvent ignore the vital humanitarian relief provided by the United States military during Hurricane Katrina, the Indian Ocean tsunami disaster, and the recent earthquake in Haiti. If DoD were eliminated tomorrow, who or what would replace it? Would the services they provide be free? What real "savings" would be achieved by doing away with the only American government program that actually works as advertised and which - despite dramatic reductions in equipment, budget, and personnel over the last 70 years - has retained the trust and confidence of the American people for over 4 decades?

"BUT EUROPE HAS HEALTH CARE AND THEY'RE FINE"

Not according to John Lipsky of the International Monetary Fund. In a speech delivered to the China Development Forum this week, Lipsky warned the world's "advanced economies" that escalating debt directly attributable to runaway entitlement programs poses an urgent threat to the fiscal health of the entire world. The solution, he says, is deep cuts to social welfare programs:

We project that gross general government debt in the advanced economies will rise from an average of about 75 percent of GDP at end-2007 to about 110 percent of GDP at end- 2014, even assuming that the temporary, crisis-related stimulus measures are withdrawn in the next few years. Indeed, we expect that all G7 countries except Canada and Germany will have debt-to-GDP ratios close to or exceeding 100 percent by 2014. Already in 2010, the average debt-to-GDP ratio in advanced economies is projected to reach the level prevailing in 1950, in the aftermath of World War II. Moreover, this surge in government debt is occurring at a time when pressure from rising health and pension spending is building up.

...As I noted earlier, the projected government debt increase in the advanced economies is only partly due to discretionary fiscal stimulus. In fact, such measures has accounted for only about one-tenth of the projected debt increase. Thus, merely winding down the stimulus will not come close to bringing deficits and debt ratios back to prudent levels, considering the projected increases in health care of other entitlement spending.

As a gauge of the potential magnitude of effort that will be required ... bringing general government debt ratios in advanced economies back to the pre-crisis average of 60 percent by 2030 would require steadily raising the structural primary balance from a deficit of about 4 percent of GDP in 2010 to a surplus of about 4 percent of GDP in 2020—an 8 percentage point swing—and keeping it at that level for the following decade. ... any primary surplus improvement in the coming years will have to be accomplished while swimming against the already rising tide of entitlement expenditures on health care and retirement.

... the bulk of the required progress will have to reflect reforms of pension and health entitlements, containment of other primary spending, and increased tax revenues -- possibly through the implementation of both tax policy and tax administration measures.

Of course the CBO estimates are more optimistic. I leave it to you to decide whether this optimism is warranted in light of Congress's habit of piling on additional expenses after a bill is passed. But regardless of whose warnings you choose to heed - the optimistic ones that have repeatedly been trumped by reality or Lipsky's warning, there's a sobering truth here: unlike the soaring debts of the 1940s (which were a function of temporary military spending related to WWII), the deficits carried by the G7 nations are a function of permanent social welfare programs.

The implication is clear: we cannot continue to kick the can down the road and we cannot ignore trillions of dollars in unfunded liabilities. We cannot ignore that promising benefits we can't pay for is not only a self serving, cynical lie but a sure fire recipe for fiscal disaster.

The problem is real. It is growing. And instead of addressing the situation right now, today, we have made it worse by loading more debt to an already dangerously overloaded system. Keep in mind that the following chart does not include the costs of health care reform:

debtload.jpg

The consequences of a government default on its obligations would be catastrophic. The number of Americans who are dependent upon revenue from the federal government is at an all time high:

CDA1001_chart12.ashx.gif

The solution will not be easy, but it is no less necessary. Now is not the time to argue over who is responsible for the predicament we're in. The sad truth is that we are all responsible. For too many years we have all - all of us - allowed public servants to spend money they don't have and placate us with empty promises of illusory benefits they can't pay for.

We need leadership, and most importantly the federal government must stop lying to us, face reality, and change course. We were once a great - and a self reliant - country. The envy of the free world. We must stop waiting around for someone else to fix our problems and rediscover the spirit that made America the world's largest and richest superpower:

We search the house the three of us. The Deputy shakes our hands.

But as he gets in his car and drives beside Tom and I as we walk to Toms house, he remarks “I envy ya’ll.”

“How so?” Says I.

“You guy seem to be self sufficient. Every storm we come up here and ya’ll have already cleared your roads. We hardly ever get calls up here. It’s always quiet, and peaceful. Now I come up here and you two are doing house by house searches practically. ” he laughs and starts to pull away.

“I wish had more neighborhoods where neighbors took care of neighbors.”

Or we can continue to kick the can down the road and hope that our children and grandchildren will rescue us from our own fecklessness.

Posted by Cassandra at March 26, 2010 08:23 AM

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Comments

Beautiful as always Cas!!!

And thanks for the link :)

Posted by: BloodSpite at March 26, 2010 11:28 AM

Great post, BloodSpite. Years ago a good friend of mine (a working class Democrat who was raised in the South side of Chicago) told me what happened when she was a kid and someone got sick or ran into financial difficulties.

Their neighbors passed the hat. They brought dinners and stepped up to the plate because it was considered *shameful* to be on the government dole.

Now, it's considered stupid not to be. How we have fallen.

Posted by: Cassandra at March 26, 2010 11:46 AM

There are several likely alternatives:

1)Nothing will be done, in which case we will soon begin to resemble Argentina. High inflation, high unemployment, more political corruption. More?

2) Taxes will be raised (which have nothing to do with controlling spending), which will increase unemployment. Stagflation and the Weimar Republic. Wash, rinse and repeat.

3) The US Government at some time in the future (say around 2020 when I get to retirement age) renounces the debt, plunging the whole world into economic chaos for a few years, but chaos in America for the rest of my and my children's natural life.

The dominant trend, upon some limited comprehension of the so called Health Care Reform bill just passed by Congress, and signed by our President, is, in phase one, coporatist in nature, providing a huge windfall of buisiness to insurance companies.
However, in the mandates to come, the insurance companies will be forced to accept "losses", which will, within the decade, force them into bankruptcy.
Single payer, in our near future.

There is no good alternative out there. The Republicans will not be able to repeal this HCR mess, unless they capture both Houses of Congress and the presidency in 2012. That is a long way away.

Hiding out in Ohio with lots of beer and guns, I am

Posted by: Don Brouhaha at March 26, 2010 11:49 AM

Hiding out in Ohio with lots of beer and guns, I am

BITTER GUN CLINGER! WHY DO YOU HATE BARACK OBAMA?

Posted by: Logical Refutations R Us at March 26, 2010 12:08 PM

Wonderful analysis and great (if scary) post. It made the fallout of the HealthCare Bill clear, and that clarity is extremely scary! I liked the post so much, I linked to it as a "must read." Great job!

Posted by: lela at March 26, 2010 12:16 PM

Thanks so much :) That means a lot to me.

Posted by: Cassandra at March 26, 2010 12:19 PM

Hollywood is west of the Mississippi and Follywood is east of it.

They both produce fantasy. The difference is I have the option to buy a $10.00 ticket and then leave the theater if it's a bad film. Follywood Productions are epic and serial and you are forced into watching a 4-year horror story.

Posted by: Sadie at March 26, 2010 12:38 PM

Nicely done, Cass.
GDP is down. Personal income is down. Taxes are up. Deficit is through the roof, and if wasn't for the North Koreans attacking a ROK navy vessel the yeild on the bond market would be somewhere north 4% (that is if you could cget anybody to buy our t-bills at that rate). Inside the Beltway, meanwhile, they're throwing feces at each other.

So what I want to know is this:
WHY IS EVERYONE TRYING TO RUIN MY FRIDAY?

Posted by: spd rdr at March 26, 2010 01:19 PM

Excellent analysis and well-written, as usual.
Do you mind if I send a link to this? I have some friends that would be interested in this.

spd, take the beer fu test. I did and scored 7 out of 15.

YES!!

Posted by: Cricket at March 26, 2010 01:40 PM

One other thing. It is important to not only be prepared, but to live it in small things.

For example: I am armed. I didn't want to be, but circumstances at our other house forced that decision. So, I have been practicing. I don't carry because I don't need to, but when we go to our other house I am prepared...JIC.

There are other things; getting out of debt and staying out of debt. Your mortgage you can't help, but delayed gratification you can. If it is a want, no. If it is a need, pay cash if you can, and if you have to go into debt, get out as quick as you can.

Donate to charities. I am a big believer in what goes around, comes around. Bread cast upon the water comes back with butter and sometimes, jam.

Have a food storage program in place. What if you couldn't buy food for a year? Or if you didn't have a garden? Could you raise or make your own food? Do you have skills that you can barter with? Provident living is just that; living within your means.

It is time we held government to that same standard.

Posted by: Cricket at March 26, 2010 02:13 PM

Yes, I am a bitter clinger....

"...and to the Republic, for which it stands,.."

A lot more than my Friday is being ruined

As to the rest of your statement, "Logical Refutations", I will let that pass on such a widely read public web site. DHS may be watching.

This is not a free country any more.

Posted by: Don Brouhaha at March 26, 2010 02:39 PM

"Mwah!" (making kissing motions).

Love you, Don :p

Posted by: Cassandra at March 26, 2010 02:43 PM

You know, I was involved in a discussion the other day with someone talking about how we shouldn't be paying for all these illegal wars so we can pay for entitlements. I brought up (without supporting links - didn't have the time) how, even if we were foolish enough to get rid of DoD, that still wouldn't pay for all these things... You say it so much better.

Posted by: Miss Ladybug at March 26, 2010 07:58 PM

Our representatives may be short-sighted at times,but they are not all of them stupid. Neither is our POTUS. So, at the risk of sounding like a conspiracy theorist, my question is this....what are they trying to do, Really? We are headed toward an iceberg, what is there to gain by sinking the ship? And WHO gains?

Posted by: DdR at March 26, 2010 11:29 PM

I'm leaning towards "d".

Seriously darlin', you really shouldn't ever give up blogging entirely. Occasional breaks, OK, but please don't just quit. You rock, girlfriend!

Posted by: camojack at March 27, 2010 03:55 AM

What does the Republic stand for again, appeasing Leftists, making sure they live luxury lives until death, and also elevating them to Godhood? Is that what this Republic stands for?

Posted by: Ymarsakar at March 27, 2010 11:57 AM

I've always been a unhealthily obsessed with planning for the end of the world, so I normally indulge that bent just enough to keep my inner child reasonably contented, while avoiding any real impact on my life. Lately, my outer adult is starting to agree with the inner child that we'd better batten down the hatches in all kinds of ways. No debt, decreased spending, more barter, more under-the-radar arrangements, more growing our own food. I'm really focused on maximizing the chances that we'll have access to independent medical care no matter how insane the bureaucrats get. I do wish we lived in a more defensible spot. The best I can say for us here is that we're so far out in the boonies that it's hard to imagine anyone taking an interest until they've finished looting the cities.

I'm not convinced that we can't take back both Congress and the White House by 2012, but I worry that that won't be enough if the replacements are of the more-of-the-same-but-slightly-less-so camp. I'm often discouraged by the number of seemingly ordinary people who believe they can collectivize their most basic obligations. Even the people who can see how wrong things are going are, in many cases, still addicted to the notion that the government can supply them with what they need, or protect them from risk, or repeal the laws of supply and demand when their impact is too harsh.

Posted by: Texan99 at March 28, 2010 10:49 PM

There's a farm down the road that just went up for sale, Tex. Plenty of food-growing opportunities, away from any major cities, but with Athens, GA, close enough in case we need to mount a looting expedition of our own...

Posted by: Grim at March 28, 2010 11:17 PM

We're growing lots of food here, and expanding our arable area daily! But I'm not kidding myself that we don't rely on a complicated manufacturing and commercial system for many things we're not prepared to do without.

Still, there are some dependencies I can minimize. And I'm feeling a greater need to rebel than I can ever remember feeling before. We did fill out and mail in the census form, if only to help ensure that Texas takes four representatives away from California.

Posted by: Texan99 at March 28, 2010 11:35 PM

...but with Athens, GA, close enough in case we need to mount a looting expedition of our own...

*Raiding* expedition, Grim -- not looting, *raiding*...

Posted by: BillT at March 29, 2010 02:57 AM

One way to prevent others from looting you is teaching them to be self-reliant.

Canning, curing meats, drying produce, baking with whole grains.

We do all of this because we were both taught how. My mother was able to get eggs and milk from a friend who had chickens and a cow. Her part of the bargain was to either pay cash or trade something, like sewing skills.

Hunting and gathering, if you know how and what, can make the difference in survival if you can't get what you need. That also includes medicinal herbs.

Just before we left Kentucky, a wise old farmer taught me how to identify certain trees in the winter, and which ones were good for medicine, and when to gather for maximum benefit. That was 17 years ago, and I have not retained that information. You don't use it, you lose it.

Posted by: Cricket at March 29, 2010 10:28 AM

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