When it comes to managing our annual deficit and slowing down the growth of our nearly $19 trillion of national debt, no other topic gets discussed more than entitlement reform. Although we all know entitlement spending is big, let’s look at the facts. In 2014, the U.S annual budget/expenditures were over $3.5 trillion. Of this amount, entitlements/transfer payments (e.g., Medicare, Medicaid, Social Security, food stamps and other welfare related programs) comprise almost $2.2 trillion or 62% of total spending (see Table 1 – 2014 Federal Budget Spending chart). With healthcare cost increasing at twice the rate of overall inflation over the past three decades, this percentage of the total U.S. annual budget will only get bigger. It won’t be until the baby boomer generation passes on and is no longer receiving Social Security and Medicare will we see overall entitlement spending as a percentage of the U.S. annual budget starting to diminish.
Although most people agree that we need to get our deficit spending under control, these very same people don’t want the benefits they like to be touched. Since there is a lot of wasteful spending in Washington, most people say to cut there first. Fair enough. I don’t think anyone would disagree that there are billions of dollars being wasted in every program and department. For example, if the federal government was willing to look at all non-entitlement spending, excluding interest on our debt, (e.g., defense, foreign aid, etc.) they could easily find $100 billion a year in savings. Sounds promising, but our annual deficit (revenue less expenses) is roughly $600 billion. That still leaves a $500 billion gap. And although defense spending is still a big piece of total Federal Spending (17%), the percent of total defense spending has been shrinking over the past 50 years where entitlement spending, which is included in Mandatory Spending, has exploded (see Table 2).
So how do we finance this growing problem? Well, we we can always tax the wealthy and go after the top 1%. Since this is something that the majority of people are in favor, especially the voters who are part of 99%, this looks like an easy solution. Unfortunately, even if the government decided to tax 100% of the taxable income earned by the top 1%, it only would generate enough revenue to cover less than four months of federal spending. Although this would never happen, the point I’m trying to make is we can’t tax a certain group, no matter how wealthy they are, in order to dig ourselves out of this hole.
Because we’ve put off a solution to these problems for the last two decades, the immediate solution will involve pain for everyone. Just remember, solutions to problems are abundant when you tackle the situation early on. Just think of it as a pyramid where the very wide bottom represents a plethora of options that can be analyzed when searching for a palatable solution. These options range from minor to moderately painful. But if the problem gets ignored over time, the potential solutions start to shrink and the likely fix becomes less palatable. At some point, you’re out of time and easy to swallow solutions are non-existent. When this happens, the fix will be so punitive and far reaching that everyone will immediately feel the pain.
Now I know you’re probably thinking why in the world would any economy choose measures that would be so catastrophic to every American. The answer is simple. We won’t have a choice since the market will dictate our future. To explain, if our deficit spending creates such a mountain of debt that no one wants to lend us money (i.e. purchase our debt), we will be forced to raise interest rates just to entice people to take on the risk of purchasing debt from a country that could default on their obligations. Higher interest rates, coupled with rising inflation, would devalue our currency to levels that would take a wheel barrow full of cash to buy a loaf of bread. Don’t think this couldn’t happen, just look at the historical hyperinflation that Argentina or Russia experienced that literally destroyed their economies for more than a decade.
The good news is that are several changes that could easily be implemented to preserve Social Security and Medicare indefinitely. These changes would keep existing benefits for retired seniors unchanged to ensure that no one would be exposed to higher cost and/or lower benefits while they’re in retirement. Although this sounds positive, it’s almost impossible to have a conversation about these potential changes as the lack of support by everyone is overwhelming. Why is that? The obvious answer is that people like these programs and don’t want any changes for anyone. Unfortunately, this philosophy just isn’t realistic. You can’t ignore the fact that we will eventually get to a point that changes will have to be made. And once we run out of options, you’ll see both political parties unanimously agree to implement immediate draconian policies on everyone since without changes; these programs won’t survive for anyone.
In Part II of Entitlement Reform , I’ll discuss various options that can be easily implemented to save both of these very important social programs.