"'Mandatory spending' includes entitlement programs such as Social Security and Medicare, which are provided by law rather than through the annual appropriations process...Of course, all government spending can be changed through legislation, so no spending is really 'mandatory.'"
-- Greg Mankiw
Some problems are hard. Iran. Health care. Global warming. The proposed solutions to these problems typically are painful. People do not like painful solutions, and so little gets done. Perhaps this is for the best, given all of the uncertainties involved.
But there is one problem that is easy to solve. The specter of future entitlement shortfalls could be eliminated with the stroke of a pen.
The problem is that Social Security and Medicare payments are on course to rise to unprecedented levels as a percent of GDP. See this chart, which Harvard professor Greg Mankiw points to in his blog post mentioned above. The entitlement burden builds dramatically in the middle of this century, when people now in their 30's and early 40's reach the age at which they become eligible for Social Security and Medicare. This "retirement age," or the age of government dependency as I prefer to call it, has been overtaken by gains in longevity and a slowdown in birth rates. The ratio of elderly dependents to workers is going to rise, and that is going to cause a major financial crisis for entitlement programs as currently structured.
The solution, as I have argued for several years, is to raise the age of government dependency for workers now in their 30's and 40's. This is a painless solution, because (a) it does not affect anyone who currently receives our is counting on government entitlements and (b) it does not really affect people now in their 30's and 40's.
For people in their 30's and 40's today, the age of government dependency is only a promise. As of now, projected entitlement benefits to young workers are only promises that, under conservative assumptions, the government will be unable to meet. If the assumptions pan out, then the actual benefits that young workers receive when they finally retire probably will have to be reduced. It seems to me that young workers are no worse off if their promised benefits are reduced now (by raising the age of government dependency) than if their actual benefits are reduced when they reach their late 60's. In fact, they probably are better off knowing the score now, when they can do something to accumulate personal retirement accounts, then thirty years from now, when it is too late.
With the stroke of a pen, an increase in the age of government dependency for today's young workers would make Social Security and Medicare solvent. If longevity were to hold at current levels, then raising the age of government dependency to somewhere between 72 and 75 probably would eliminate most or all of the surge in entitlement spending projected for later this century. However, because longevity is likely to continue to increase, the age of government dependency needs to be indexed to longevity going forward.
Changing Our Minds
Part of me is optimistic that economic growth will speed up in the coming decades, so that entitlement spending will not be such an overwhelming burden. (See The Great Race.) If that forecast turns out to be true, we can always change our minds about the age of government dependency.
Suppose that we raise the age of government dependency for young workers, but economic growth takes off over the next twenty-five years. In that case, we could revise upward our promised benefits to today's young workers by letting them have the age of government dependency that is in force today. In other words, if economic circumstances warrant, we can make more generous promises to today's young workers.
For now, it seems that the most logical thing to do is to make promises to today's young workers that are consistent with what we expect to be able to afford, given conservative assumptions about economic growth. As the saying goes, it is better to under-promise and over-deliver than the other way around.
A Political Gun to Our Heads
There are some issues where the views I hold are outside the mainstream. However, among economists, both on the left and the right, essentially everyone who looks at entitlement spending agrees that it would be helpful and appropriate to raise the age of government dependency. Yet we are told that this simple, common-sense solution is politically impossible.
What I do not understand is this: what political constituency insists that today's young workers must be promised an unrealistically low age of government dependency? I do not know any young workers who are demanding it. I do not know any old workers for whom it should matter.
Future entitlement spending is a fiscal gun that is being held to our heads for no reason. With the stroke of a pen, we could get rid of the gun. Who are the interest groups that want to keep the gun to our heads, and why do they want it there?Arnold Kling is a TCS Contributing Editor and author of Learning Economics.