... the people behind the Urban Institute research. In traditional interview format, our experts talk about the nature of their work, offer insights on what they've learned, and describe the personal goals that keep them going.
Senior Fellow Rudolph Penner, former director of the Congressional Budget Office, sizes up our fiscal future and argues for responsible budgeting. As baby boomers retire and health care costs keep rising, spending for Medicare, Medicaid, and Social Security will grow faster than federal revenues, pushing the deficit to an unmanageable size. The solutions—changes in spending and tax policy—are politically charged, but crucial and unavoidable.
Listen to an audio recording of the Urban Institute’s 40th Anniversary Roundtable “Can Fiscal Responsibility Be Politically Palatable?”
Five Questions Archives
September 17, 2008
1. Budget experts warn that we’re on an unsustainable fiscal path. What does that mean and how serious is the problem?
Social Security, Medicare, and Medicaid are growing faster than either tax revenues or the economy. It’s a very serious problem because it could ultimately cause a financial crisis. If we keep our tax burden about the same as it’s been historically, deficits are estimated to rise by 6 to 9 percent of the economy over the next 30 years. If we stay on this path, the debt will pass 100 percent of the GDP before 2030!
The only reason we’re getting away with the deficits we’ve had recently is that foreigners have been eager to buy our bonds. Foreign investors used to hold a trivial amount of our debt, but now it’s a very substantial portion and that makes us vulnerable to pressure. You can already see the effects—one of the reasons the Treasury Department just took over Fannie Mae and Freddie Mac is pressure from foreign debtholders, like the Chinese government. That pressure was obviously very effective, but it’s just a hint of how we can lose our independence as our debts to foreigners mount.
What will happen if we do nothing? It’s quite possible that most voters today won’t be affected at all and that it’s really more of an issue for their children and grandchildren. Those generations could see their standard of living erode significantly as the government borrows more and more. They could see, as we’re already finding, domestic programs being squeezed out of the budget. In the worst-case scenario, the next generation could see a financial crisis that, if badly handled, could either turn into a severe recession or rampant inflation if the government decides to get out of debt by printing money. We can, and we need to, get off this path.
2. Can’t we just grow our way out of this?
No. The basic problem is that the faster the economy grows, the faster program costs are likely to grow. Social Security benefits are linked to wages and the economy. The faster the economy grows, the faster wages grow, and, so the faster the cost of our promises grows. With Medicare and Medicaid, it’s a little more complicated, but most researchers show a pretty close tie between the wealth of an economy and the demand for health services. As the economy grows faster, the demand for health care will very likely grow and that will increase costs even more.
3. Why is responsible budgeting so politically challenging?
The simplest reason is that tax increases and spending cuts are never popular politically. The public has a natural hostility to these changes, so when politicians propose such actions, they can be very easily demagogued, especially in our world of 30-second sound bites.
Also, the media and politicians have not done a good job of making the problem clear to the electorate. The media tend to think budget issues are really boring. Politicians are also at fault—it takes heroic courage to lead on this issue. That’s why an ultimate solution has to be bipartisan. Both parties have to join hands and jump off the cliff together to get anything done.
4. What can we do to overcome these political barriers?
It would be nice to think that political leadership, especially from the White House, could get us past these barriers. But neither candidate for president right now is confronting these issues, and that is very worrisome. It’s clear they’re going to need some kind of cover to make reforms. The best kind of cover might come from a bipartisan budget summit, or perhaps, from a commission. Several variants have been proposed in the House and Senate. Their conclusions could give the president and Congress an excuse for moving forward. Most commissions have failed in the past, but I am ready to try anything. The worst kind of cover would be a financial crisis that actually forces policymakers to do something.
We also need to get the point across that the policy changes necessary to avoid these calamities are not that severe. Social Security payroll tax revenues will grow with the economy and are probably sufficient to give the next generation higher benefits, in an absolute sense, than people get today. They won’t get the benefits they’re promised, but they’ll get benefits. Social Security won’t disappear.
Of the three big programs, Medicare and Medicaid are growing fastest because they’re victims of excess increases in health care costs and the aging of our population. A major driver of health costs is technology. The dire projections that I’ve been talking about assume that the technology keeps getting better but more expensive, as has been the case for decades. Rationing the improvement in technology, while very difficult, wouldn’t necessarily decrease our level of care. Some expensive technologies really don’t do an awful lot for people’s health anyway. We’re not talking about making the whole population sick or impoverished in retirement; we’re simply talking about not increasing benefits as much as is promised.
5. Why was this topic chosen as one of three issues to highlight during the 40th anniversary of the Urban Institute?
It is really one of the most important economic problems facing the nation, if not the most important. It’s a problem that has to be cured and the consequences of not curing it could be very severe.
For this roundtable, we have assembled a very interesting and experienced group of people, including budget experts, former OMB directors, and former members of Congress known for their desire to pursue fiscal responsibility. We have a very able bunch of experts who will be putting out ideas for overcoming the political barriers to reform.
We encourage people to be positive so it’s not a litany of why we cannot make progress. We’ll talk about mechanisms for bringing Medicare, Medicaid, and Social Security under control. There are a lot of ideas kicking around— commissions, budget summits,
automatic trigger devices. It’ll be interesting to see what this highly skilled group thinks about which ideas are most promising.
