By Richard Jackson, Special to CNN
Editor’s note: Richard Jackson is a senior associate at the Center for Strategic and International Studies and author of Lessons from Abroad for the U.S. Entitlement Debate. The views expressed are his own.
America’s long-term budget challenge may have dropped off Washington’s radar, but it has not dropped off the public’s.
According to the Fiscal Confidence Index released last month by the Peter G. Peterson Foundation, 59 percent of the public said that the nation is on the “wrong track in addressing the national debt,” while 67 percent said that their level of concern has increased over the past few years. The public is right to be concerned.
But what many too often fail to appreciate is that confronting the challenge will require a far-reaching reform of entitlement programs, which make up well over half of federal spending today and account for all of the projected growth in noninterest outlays as a share of GDP over the next three decades. The most recent Congressional Budget Office projections may show that the near-term budget outlook has improved, but the long-term outlook, driven by rising entitlement costs, remains as daunting as ever.
The most fundamental problem with America’s entitlement system is that the major retirement and health-benefit programs are set on a rising autopilot. Social Security benefit awards are directly indexed to wage growth, while Medicare and Medicaid benefits are in effect indexed to an expanding package of medical services whose cost tends to rise much faster than wages. With the ratio of beneficiaries to workers due to surge over the next few decades as boomers retire, total spending will climb inexorably as a share of workers’ wages and government outlays, regardless of other budgetary priorities and regardless of society’s ability to afford it.
As the United States grapples with entitlement reform, it would do well to learn some lessons from the experiences of other countries. A new report by the Center for Strategic and International Studies notes that many countries have recently enacted reforms that have trimmed benefit formulas, raised retirement ages, and put in place new funded pension systems that supplement or partially substitute for pay-as-you-go government systems.
Several countries – including Germany, Italy, Japan, and Sweden – have gone further and introduced “automatic stabilizers” into their public pension systems that, directly or indirectly, index benefits to the growth in the payroll tax base. These stabilizers may differ in design, but they have two crucial characteristics in common. First, they are all expressly designed to offset the full impact of demographically driven cost growth. And second, they are all self-adjusting. In effect, they put entitlements on a new kind of autopilot – one that is preprogrammed for cost constraint rather than for cost growth.
Automatic stabilizers represent the global cutting edge in entitlement reform – and applying one to Social Security would be technically straightforward. And, in principle, one could also be applied to Medicare, provided that its benefits were first capitated – that is, converted into a fixed annual outlay per beneficiary rather than the cost-plus system we have today.
Introducing automatic stabilizers into our entitlement system would not only be good policy, but might have political advantages as well. The fact that the incremental benefit cuts triggered by the stabilizers would be small in any given year could help to defuse a potential voter backlash. Meanwhile, political leaders would be spared having to repeatedly revisit a divisive issue in future years.
It’s ironic that other developed countries, most of which have faster-aging populations and more expansive welfare states than the United States, are leading the way on entitlement reform. Part of the explanation may be that, until recently, America’s age wave still loomed over the horizon, while in Europe and Japan aging populations have been burdening public budgets, forcing up payroll tax rates, and slowing economic growth for decades.
Part of the answer may also lie in America’s peculiar entitlement ethos. In Europe, government benefit programs may be fiercely defended, with the opponents of reform manning the barricades and calling general strikes. But in the end, everyone understands that they are part of a social contract that is subject to renegotiation and revision. In the United States, much of the public views Social Security and Medicare as quasi-contractual arrangements between individuals and the state. This mindset, which is encouraged by the misleading insurance metaphors in which the programs are cloaked, may make old-age benefits more difficult to reform in the United States than in Europe’s large welfare states.
Whatever the explanation for the differences in the way social programs are seen, there is no question that most developed countries have addressed their long-term budget challenges with greater seriousness than the United States has. Significantly, the impetus for reform has been as likely to come from the left as the right. And though reforms have sometimes been reversed when the party in power has changed, more often than not they have ended up acquiring broad support across the political spectrum.
This success is due in part to the considerable attention that the architects of reform paid to coalition building. Yet the very fact that political leaders in other countries have been able to build broad coalitions in favor of entitlement reform suggests that they have grasped a deeper truth that most U.S. political leaders have yet to acknowledge.
The reality is that unchecked growth in old-age benefit spending threatens the agendas of both right and left. In the end, it will not only undermine small government, but progressive government as well.