Monday, October 05, 2009

The Coming Collapse of the US Entitlement STATE

For perspective, consider that in 1970 — just a few years after Medicare's enactment — the defense budget stood at 8.1% of the nation's economic output, as measured by GDP. Combined spending on Social Security, Medicare, and Medicaid, meanwhile, stood at 3.9% of GDP. But in 2019, almost a half-century later, defense is expected to fall to about 5% of GDP, while the big three entitlement programs will approach 12%. By 2050, they will exceed 18% of GDP — which is about the historical average of total revenue collection each year. The U.S. government, like GM today, will then be mainly in the business of providing health and pension benefits, and will struggle to perform its other basic functions — maintaining a standing army, for example — on the side.

The paradox of our entitlement system is that although it is designed to mitigate risk at the individual level, it is now creating a massive economy-wide risk. For years, economists across the political spectrum have been warning that unconstrained federal borrowing will ultimately leave the country unable to issue debt at favorable and affordable rates of interest. When that point is reached, there will be little choice but to embark on a long period of painful fiscal contraction and austerity, with deep and immediate cuts in benefits and steep rises in taxes.


The impulse to insulate the middle class from the cost consequences of their choices — an impulse that has defined our longstanding middle-class contract — has done great harm and stands to do far more. The remedy must be to redesign our entitlements so that the choices the middle class makes in terms of work, family, and health care will promote more productivity, efficiency, and wealth, rather than the shrinking of the labor force and the growth of government.

Done right, a new arrangement would both strengthen our fiscal outlook and improve the economic standing of American families. The path to such a new arrangement will not be without its costs, but it will surely yield great benefits. The new middle-class contract would still work to mitigate risks and would still care for the old and the needy, but it would do so in ways that encourage personal responsibility, respect individual choice, and foster the work ethic that has made America's middle class the backbone of an unrivaled age of prosperity and strength.