To rightsize spending, entitlement programs must be reformed
By Fareed Zakaria
The American left has trained its sights on a new enemy: Pete Peterson. The banker and private-equity billionaire is, at first glance, an obvious target—rich and Republican. He stands accused of being the evil genius behind all the forces urging Washington to do something about the national debt. “The Peter G. Peterson Foundation is deficit-scold central,” writes columnist Paul Krugman.
But for a deficit scold, Peterson does not seem very concerned about today’s budget. “The current deficit is not the problem,” he told me recently. “I wouldn’t enact any measures to reduce it until the economy recovers properly.” In fact, he is even in favor of additional stimulus spending, “as long as it’s well designed and paid for,” he notes. “My overriding concern has always been the long-term outlook, the massive structural deficits that we face as the baby boomers start retiring in large numbers. That’s the problem we’ve simply refused to confront.”
The facts are hard to dispute. In 1900, 1 in 25 Americans was over the age of 65. In 2030, just 18 years from now, 1 in 5 Americans will be over 65. We will be a nation that looks like Florida. Because we have a large array of programs that provide guaranteed benefits to the elderly, this has huge budgetary implications. In 1960 there were about five working Americans for every retiree. By 2025, there will be just over two workers per retiree. In 1975 Social Security, Medicare and Medicaid made up 25% of federal spending. Today they add up to a whopping 40%. And within a decade, these programs will take up over half of all federal outlays.
Some argue that Peterson has been banging this drum for years—decades —and yet the grim reaper has not arrived. But we have postponed the problem by borrowing heavily for three decades, and there is a limit to how long we can keep increasing debt, which now stands at 100% of GDP. The budgetary strains are already apparent. Federal spending on everything other than entitlements and defense has been steadily shrinking for decades. Cities and states are in a downward spiral. A recent report from the National Governors Association points out that Medicaid is now the single largest item on state budgets and has grown by over 20% each of the past two years. As a result, spending on everything else is being slashed, from police and poverty programs to public education.
This trend will intensify. The Peter G. Peterson Foundation calculates—using Congressional Budget Office numbers—that by 2040 we are likely to spend 10% of GDP on interest payments alone (vs. 1.4% today). That’s four times what we spend on education, infrastructure and scientific research. Since entitlements and defense spending have powerful interest-group support, what will wither is everything else. The left must ask itself why it is tethered to a philosophy that insists that government’s overwhelming responsibility is for pensions and health care even when, as an inevitable consequence, this starves other vital functions of the state. Is insurance for the elderly the only important function of government? Above education? Above scientific innovation? Above investments in infrastructure and energy? Above poverty alleviation? And yet that is where we are headed.
Peterson is the wrong target for liberals. Since the 1980s, he has spent most of his political energy attacking his fellow Republicans for their allergy to taxes. He came to prominence as a deficit hawk in 1982, when he wrote a long essay on Social Security for the New York Review of Books; he later wrote a cover story for the Atlantic in 1987. When Ronald Reagan was at the height of his popularity, Peterson ridiculed supply-side economics, knowing full well that this made him—a former Secretary of Commerce—toxic for any higher Republican office.
“I want to strengthen the safety net for the poor. But to do so, we have to reform entitlements, because they are simply not sustainable in their current form,” Peterson says. “The elderly population is doubling, and health care costs are rising rapidly.” His foundation is making the control of health care costs its No. 1 priority. “But we need to start making changes soon, because the longer we wait, the more painful will be the eventual changes,” he says.
In an important essay, “The Long Term Is Now,” William Galston, a former Clinton official, tries to face up to the budgetary crisis being produced by demographics. He proposes a rethinking of long-term care—which eats up a huge part of the budgets of Medicare and Medicaid—but in a way that doesn’t unendingly eat up government revenue. That’s the kind of innovation and reform the left should bring to the entitlement problem. Shooting the messenger doesn’t help.