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OBAMA and his RIVALS duck the ENTITLEMENT crisis | Michael Barone | Politics | Washington Examiner

August 27, 2011

Obama and his rivals duck the entitlement crisis

By: Michael Barone | Senior Political Analyst

08/27/11

Rep. Paul Ryan, R-Wis., ranking Republican on the House Budget Committee, gestures during a news conference on Capitol Hill in Washington, Wednesday, April 1,2009, to talk about an alternative Republican budget plan he is pushing in the House that would cut income tax rates and radically overhaul the Medicare program providing health care to the elderly. (AP Photo/J. Scott Applewhite)

Some of society’s most intractable problems come not from its failures but from its successes. Often you can’t get a good thing without paying a bad price.

A prime example is our public old-age pension system Social Security. It has been completely successful in wiping out poverty among the elderly. Old ladies no longer have to eat cat food to survive.

But we pay some prices for this. One is a lower savings rate. China has a humongous savings rate in part because it has no reliable old-age pension system. People have to save if they don’t want to starve.

In the United States we got out of the habit of saving. In the decade up to the financial crash of 2008, the U.S. savings rate fell below zero.

We felt comfortable borrowing on the supposedly ever-increasing values of our houses to support current and sometimes lavish consumption. Now we’re paying the price.

But even if our savings rate rises back to the level of, say, the 1980s, it still may be lower than optimal.

The longer-term price any society pays for a public old-age pension system is lower birthrates. Farmers had large families in order to provide additional labor for their working years and sources of income for their dotage. So did factory workers a century ago.

In Western Europe birthrates have fallen below the rate necessary to replace population — in some countries, far below. The American birthrate has remained, barely, above replacement rate largely because of immigration. But immigration has slumped during the recession and may never return to the 1990-2008 level.

Unfortunately, under Social Security like most public pension systems, current pensions are paid for by current workers. As life spans increase and birthrates fall, the ratio of pensioners to active workers falls toward one-to-one.

That’s not enough to support the elderly in anything like the style to which they have been accustomed, unless tax rates are sharply increased. And sharply higher tax rates, as Western Europe has shown over the last three decades, reduce long-term economic growth.

That’s the problem, often abbreviated as “entitlements,” facing our political system.

Some politicians have tried to address it. Fresh from his re-election victory, George W. Bush sought changes in Social Security in 2005. The obvious reform, then as now, was to reduce high earners’ pensions by adjusting them upward by inflation rather than wage growth.

But Democrats would have none of it. As Bush’s job approval plummeted in the wake of Hurricane Katrina and lack of success in Iraq, the issue was quietly dropped.

This year Republicans addressed entitlements again, in the budget prepared by House Budget Chairman Paul Ryan and approved in the House.

His proposal was to shift Medicare from the current plan to “premium support,” in which seniors would get subsidies to pay for their choice of competing insurance plans. This is similar to the Part D Medicare prescription drug program that has won wide acceptance and has cost far less than projections.

Once again Democrats have responded negatively. They credit their “Mediscare” tactics for a special election victory in a Republican House district in Upstate New York.

via Obama and his rivals duck the entitlement crisis | Michael Barone | Politics | Washington Examiner.

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