“We’re going to have to get back next year at entitlement reform, which is how you tackle the debt and the deficit. Frankly it’s the health-care entitlements that are the big drivers of our debt…that’s really where the problem lies, fiscally speaking.”
— Paul Ryan, Dec. 6, 2017 on a talk radio show.
Amazing. You have to give Ryan credit for consistency and a kind of brutal Republican honesty. Within weeks of pushing a huge tax cut for corporations and the wealthy, he’s basically saying Republicans plan to pay for that by making cuts to Social Security, Medicare and Medicaid.
Ryan’s “Roadmap for America” laid it all out in 2008: privatize Social Security, transform Medicare into a premium support plan, and block grant Medicaid.
Of course, Ryan is correct about these programs from a “fiscally-speaking” point of view. The three do make up the lion’s share of the federal budget and their current rate of growth is unsustainable. Come 2035 and beyond they would start to gobble up almost the whole federal budget. The three programs will comprise about 50 percent of the $4.1 trillion federal budget in 2018.
And here’s a whooping number for you: Social Security, Medicare and Medicaid will cost the government $28 trillion through 2027.
But let’s be very clear about what is happening now that could set a dangerous precedent for the future. The Republican-led House and Senate, with the support of the Trump administration, have passed tax reform bills that primarily cut taxes for corporations and people making over $150,000 a year.
As I explained in Part 1 of this series on the tax bill and health care, those cuts will increase the annual federal budget deficit every year over the next 10 years, adding a projected $1 trillion to $2 trillion to the nation’s debt by 2026 (8 fiscal years). And if economic growth lags or the economy enters a recession, the deficits could be much larger.
Our nation’s debt now stands at $20 trillion and the interest payment we (taxpayers) make on it every year is projected to be the fastest growing federal expense over the next decade.
You read that correctly: servicing our debt will rise at a faster clip than spending on Medicare, Medicaid and Social Security. Payment on the debt is projected to reach $787 billion by 2026 and in that year comprise 12.2 percent of the federal budget, up from 4 to 7 percent in recent years.
Moreover, the nation’s debt load is now 100 percent of our GDP. The only other time it’s been that high was right after World War II.
Economists of all political stripes have raised yellow warning flags about this for several years. Republicans used to wave those flags, too. But it’s now clear that if the purpose of legislation is to deliver tax cuts to the rich and corporate America—whose profits have been at record highs over the last three years and whose political donations are treasured—deficit spending and adding to the debt appear to be completely acceptable.
Here’s the thing, though: Social Security, Medicare and Medicaid are what the federal government, in large part, is supposed to do. It’s the same in other industrialized nations: retirement support for the elderly and health care are the big ticket items.
In the U.S., these core programs help 120 million mostly poor and middle-income people pay for the roofs over their heads, buy food and necessities, and get health care. All are very popular programs. For example, a recent Pew Survey found that 94 percent of Democrats and 85 percent of Republicans oppose cutting Medicare.
Yes, of course, spending on Medicare and Medicaid (and all of health care!) needs to be restrained—THE major financial challenge our nation faces. But the health coverage provided by these programs help people directly and profoundly.
And we paid for these programs! Targeted taxes payroll and income taxes (federal and state) fund these programs.
In contrast, interest payments on excessive government debt is non-productive, a waste. This is no different than it would be for a family with excessive credit card, auto loan and home equity debt. (A reasonable mortgage is different).
Imagine, for example, a family of four with an after-tax income of $60,000 a year ($5,000 a month) that has run their non-mortgage debt up to $100,000, requiring a monthly interest payment of $700 to $1,200 on top of their mortgage of $1,800. This family is in over its head and will have trouble saving for college, emergencies, and retirement.
That’s exactly where we are as a nation.
In the short-term, cuts to Medicare could be automatic. Under previous legislation, if the deficit reaches a certain point mandatory “offsets” are triggered. In 2018, that could be $25 billion for Medicare, according to CBO and other projections. For obvious political reasons, lawmakers are pledging to override those “pay-as-you-go” triggers. But for how long will they do that?
President Trump—who during the 2016 campaign repeatedly pledged to protect Social Security, Medicare and Medicaid—concurred with Ryan last week, saying that he and Congress would in 2018 “tackle welfare programs.”
Initial media reports initially assumed he meant Medicare and Medicaid. But over the Dec. 9-10 weekend, the Trump administration let it leak that it is preparing an executive order that mandates a “top-to-bottom review” of food stamps, housing benefits—and Medicaid.
GOP lawmakers are said to be crafting legislation to make it more difficult to qualify for those programs.
The next piece is this series with discuss the impending end of the individual mandate and the debate over what will replace in 2019 and beyond.
A House-Senate conference committee reached agreement on the tax bill on Dec 12. Repeal of the penalties that accompany the mandate were, as expected, included. That essentially neuters the mandate—although notably it leaves the mandate as policy technically in place. Thus a future Congress could, in theory, more easily re-impose the tax penalty.
One note on the repeal of the penalties that bears on the subject of this blog: the Congressional Budget Office (CBO) projects that doing so will save the federal government around $300 billion between 2018 and 2027, as a result of lower federal costs for the ACA premium tax credits and Medicaid. That’s in part because millions fewer people will buy health insurance. Notably, there’s dispute around these numbers, but more about that next time.
The point for now is this: here, too, Republicans are cutting taxes on companies and the rich and offsetting the loss of income resulting from that by reducing the number of people with health insurance (as well as raising the price of health insurance in the individual market). It’s that simple. It’s that brazen.
Steven Findlay is a journalist based in Washington, DC.
I added some replies below. Thanks all for the comments.
I saw this is Allan Sloan Wash Post column the other day. Sobering:
SS accounts for half the income of half the married couples taking it, and 71% of singles income. It accounts for 90% of annual income for one in four couples and 43% of singles.
And remember Medicare covers about half of total health care costs for people in the program….they pay $1,500 a year and up for Medigap plan if not in an Med Advantage plan.
From age 65 to 85 or so, seniors can expect to spend between $100,000 and $250,000 out of pocket for health care (all forms).
All this is unsustainable.
There are some potential positives likely to come out of the tax bill assuming it’s enacted before yearend. First, we will get some real world experience around whether a sharp reduction in the corporate profits tax rate will enhance economic growth or not and how corporations choose to deploy the extra profit that will stem from the new lower rate. I think much of it will be used to increase dividends and buy back stock but we’ll see and we’ll soon know.
There is a lot of good tax policy on the personal tax side related to broadening the tax base and lowering marginal income tax rates. I support those even though capping the state and local tax deduction will cost my family money here in high tax NJ. Doubling the standard deduction will simplify the tax system for millions of middle class and upper middle class taxpayers though most of the system’s complexity is easily mitigated by tax preparation software that’s been around since at least 1990.
On average, federal revenue averaged roughly 18% of GDP during the post-World War II period. If we stay in that range, it won’t be the end of the world. Fiscal 2017 spending was 20.8% of GDP. It’s also worth noting that healthcare cost growth slowed in recent years. The federal share of Medicaid spending grew only 1.7% in fiscal 2017. The standard Medicare Part B premium will remain flat at $134 per month in fiscal 2018 and only grew at a 2.16% annual rate since 2011.
If taxes ultimately need to be raised to deal with the debt and the deficit, they will be. After Reagan cut taxes early in his term, taxes were raised several times on his watch mostly to bolster the social security trust fund as part of the 1983 Greenspan Commission reforms of that program. Potentially adding $1 trillion to the debt over 10 years sounds scary but it’s in the context of roundly $45 trillion in federal spending over that timeframe.
I think the handwringing over the federal debt is overwrought and if future generations have to pay a somewhat higher percentage of their income in taxes than we did, per capita GDP will be sufficiently higher to ensure that they will still be net better off economically than we were.
Thanks Barry — Princeton and NYTimes economist Paul Krugman agrees with you…that $1.5 T might not hurt that much, as long as the economy gets a boost etc. What I sought to speak to is the principle of the thing….cutting taxes on companies and the well off and then turning right around to make up for that by slicing and dicing the entitlements. If for other reasons – like a war or continued climate disasters — the deficit and debt rises even more than anticipated, we are in trouble. I do not think tax increases will be easy for many years….perhaps a decade. Bad precedent and too much of giveaway to the well off.
Repost of a comment i made in part 1:
Here is a little dose of perspective:
The CBO analysis that comes up with 1.5T debt increase over ten years assumes GDP growth of 1.9%.
If GDP growth is 2.6% the tax plan will be revenue neutral….no addition to debt.
If GDP growth is greater than 2.6% the national debt will go down.
Current run rate of GDP growth is over 3%.
During the Obama administration the national debt grew by an average of 1 trillion per year, cumulative 10 trillion.
The apocalyptic predictions are a bit overdone.
We have had many 2 quarter periods of 3% or better growth. The key is sustaining it. Also, we are approachjng a record for length of a recovery.
Steve2, in my experience, economic recoveries don’t die of old age. They die of negative external shocks like the 1973 Arab oil embargo, the need to break the back of inflation by significantly tightening the money supply in 1981-1982, the September 11th attack and the 2008 financial crisis. Short of a big terrorist attack which can’t be foreseen or North Korea starting World War III, I don’t see anything threatening on the near term horizon.
As some economists have said…this recovery is on a sugar high. It will come to an end pretty soon, largely because inequality remains chronically unaddressed.
Thanks Paul. Almost every independent analysis forecasts an economic boost of less that 0.5% to the economy and GDP growth over the next few years in the 2% to 2.5% range.
Nothing I said goes to apocalyptic…yet….just bad policy at this time and choosing tax cuts for companies and well-off at a time when we face daunting challenge with health care costs and SS.
So when Margarit made her case for Trump, that he would shake things up, do something different. That he had promised not to cut Medicare and Medicaid, I predicted that the only thing we could be sure that would be done was to cut taxes on the wealthy. That has been the one consistent element of GOP policy since 1980. So, if they do decide to go after entitlements in any meaningful way, let me predict that it will largely, or exclusively, be aimed at Medicaid. Slight chance that they might also go after the disability part of Social Security too.
I remember that. When I “made my case”, I also suggested that as President, Mr. Trump should not touch health care in his first years in office, other than repeal the individual mandate and call it a win. Unfortunately, he wasted a year worth of political capital, only to end up doing precisely what I thought he should do, plus the perennial GOP tax cuts, and even those are watered down to basically just a corporate tax cut.
If I were to make suggestions for his second year, I would again advice that he stays away from Paul Ryan’s Randian agenda like the plague. Start the year with a HUGE infrastructure package if you really want to kick the economy into overdrive, and do what needs to be done with immigration/guest-workers, so the labor markets tighten up nicely. We can talk about welfare (I don’t like the term “entitlements”) after that, because hopefully the finances will look a bit different, and because welfare reform needs 60 votes and will have to be bi-partisan (like the Bill Clinton disaster).
DANGER AHEAD for both M&M….The administration has signaled loud and clear that it will begin going after them next year. It won’t be pretty….and they have very slim margin of votes now….and Colling will never vote for bock grants or Medicare premium support.