Need to Move Beyond Social Compact Rhetoric
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Despite presenting to Congress a budget that contained no proposals for reducing the deficit beyond large tax increases after 2012, President Obama is now willing to reduce entitlement spending. As the Washington Post explains, this is significant because it “marks the first time the Administration has made an explicit commitment to changes in entitlement programs for the purpose of deficit reduction.” On Wednesday, the President is scheduled to speak at George Washington University to layout an alternative to the budget proposed recently by House Budget Committee Chairman Paul Ryan. Press reports suggest that the President is unlikely to offer policy specifics, but instead attempt to frame the debate.
This is unfortunate because previous efforts in this regard have done more to confuse issues than to clarify substantive distinctions. In the State of the Union Address, the President forcefully knocked down the straw man of slashed benefits. This past weekend, White House staffers used the metaphor of a “’scalpel’ and not a ‘machete’” to describe the benefit adjustments it supports. The problem is that rather than assessing the economic reality of the situation and making adjustments accordingly, the Administration wants to walk a tightrope that recognizes the need to rein in unaffordable promises while simultaneously playing to the notion of a “social compact” that would be violated if cuts went too far.
Efforts to frame current entitlement promises as the fabric of a conjectured “social contract” or compact are deceiving for three reasons.
First, it is not clear when a proposed benefit cut would go so far as to violate the undefined contract. Invocation of “social contract” rhetoric confers a tactical or political advantage that comes at the expense of a transparent policy debate. If the President argues that he’d be willing to accept some cuts to Medicare as long as they keep intact the “social contract,” he would chose to disengage from a serious policy debate in favor of subtext that has more to do with name calling and assigning blame.
Secondly, changes to entitlement spending contained in Congressman Ryan’s budget and other efforts to bring federal outlays in line with costs would become operative sufficiently far in the future that no current or near retiree would be impacted. If Congress fails to take action this year, the probability increases that future beneficiaries will actually see their benefits reduced during retirement when they would be unable to adjust work and savings decisions to take into account the new benefit formulas. This also applies to the magnitude of the changes; passing benefit adjustments this year that are little more than window dressing for the next election would do little to protect current retirees from unwelcome future changes.
Finally, the “social contract” rhetoric often suggests that benefit formulas were set in 1935 and put on-autopilot. In reality, legislative changes to entitlement programs are nothing new. Social Security’s benefit formula has been adjusted 16 times since its founding. Benefit promises and revenues were adjusted nearly biannually.
The social contract was never defined in specifics and it always took into account the other generations’ ability to finance the obligations. By its very definition, a contract cannot be one-sided. When the level of required taxation on future generations is discussed candidly, making good on current promises looks more like a social diktat than a contract.
According to CBO’s analysis of the Ryan budget proposal, total spending remains well above 20% of GDP through 2030 and spending on social security and federal health care programs would grow as a share of the economy. Total government spending would be more than 10% greater than in President Clinton’s second term (average from 1998-2001 fiscal years). Whether the cuts proposed in Ryan’s budget are draconian are not, they fall well short of what would be required for total federal spending to return to the levels that prevailed during the economic growth of the Clinton Administration.
Much of the reduction comes not from programmatic cuts in later years, but from aggressive cuts today that reduce interest expense in later years. Failure to address outlays in a timely fashion would mean interest payments could consume up to three-quarters of all tax receipts by the end of the decade. Once that happens, all spending becomes vulnerable to cuts because the austerity program is likely to be imposed externally by creditors (See Greece). When lenders are unwilling to rollover existing debt at anything other than punitive rates, spending reductions become, by necessity, much more indiscriminant.
A common theme among opponents of Congressman Ryan’s budget is that reducing promised entitlement spending would essentially cheat “the American people who have paid (and are paying) into these programs in exchange for promised benefits.” This glosses over the pertinent fact that what is being paid in – both collectively and, in nearly all cases, individually – is a fraction of what is promised to be paid out. It also suggests that proposed benefit adjustments are borne out of malice or a desire to short-change. The fact is that it is attempts to perpetuate the unsustainable current arrangement that really increases the risk to current and near retirees. The numbers currently do not add up; the divergence between what is promised and expected revenue is wide and growing. Without a plan on the table to bring the lines together, everyone is at risk.
The path to economic and financial ruin from excessive government promises is very well traveled. Sudden, unexpected reductions in pensions and health care benefits are what happen to countries whose governments promise more than can be delivered. Greek retirees saw their pension benefits reduced by 15% by eliminating two payments per year, had cost of living increases eliminated, and will see future benefits exposed to the risk of fluctuations in economic and pension fund asset growth. Portugal cut future promises by 30% in 2006, but these cuts were too modest and back-loaded to avoid a bailout facility that is likely to require more ambitious cuts (and probably targeted at outlays to current beneficiaries).
If Congress were to choose to get ahead of the revenue-promise imbalance by embracing the Ryan Budget, there would be nothing to prevent future Congresses from increasing benefits in the future. Social Security benefits were gradually increased for decades. It was not until an ill-advised automatic formula was instituted in the 1970s to avoid periodic benefit adjustment that the program ran into serious trouble. The option to increase benefits later if current promises prove inadequate would also allow future retirees to plan on lower benefits and then be pleasantly surprised when Congress later adjusts benefits upwards.
How much better would this outcome be than to continue to make promises that have to be rescinded at the least opportune moments? If a 74-year old in 2030 is going to receive 20% less than what is currently promised, would it be better to alert him to that now when he’s 55 and can adjust his savings and retirement plans, or in the middle of 2030? In the end, if the social contract has any meaning, it must involve protecting those unable to change their circumstances. Congressman Ryan’s budget goes further towards fulfilling this contract than any other formal proposal.
Please join e21 on Thursday in D.C. for a discussion with Rep. Ryan on his recent budget proposal, President Obama’s response to it (in the form of a major address on Wednesday) and the on-going battle over spending and the debt limit.