To a lot of people, the Republican blueprints for balancing the federal budget over seven years portend a major sacrifice for older Americans. Headline writers, the health-care industry, and seniors' lobbies have focused mostly on proposed cuts in Medicare, the $178 billion health-care program for 34 million elderly.
In reality, though, the cuts may strike just as deep at the other end of the age spectrum. What's striking about the GOP's budget plans is that they do nothing to alter two major trends of the past two decades: the growing imbalance of federal spending on the elderly at the expense of the young, and the increasing poverty rates for children (chart).
Despite GOP rhetoric, seniors suffer relatively mild cuts under the new budget plans. Social Security, the $350 billion retirement program, is left almost untouched. Even Medicare spending will still be allowed to balloon to $283 billion by 2002. That's an annual growth rate of 6.9%, more than double the expected rate of consumer inflation. Federal retirement plan increases remain unchanged.
Much of the elderly's recent gain in wealth has been derived from federal programs that transfer money from young to old. Current U.S. spending on those 65 and older totals $600 billion, more than a third of the $1.6 trillion federal budget and four times as much as is spent on those under 25. Social Security and Medicare cost $15,387 per senior, while combined local, state, and federal spending on elementary and secondary education accounts for just $6,675 per child.
Under the GOP's budget, spending on education and welfare would be cut; the House plan would eliminate the Department of Education entirely. "We are underinvesting in our kids, while feeling obligated to retain our benefits to older people," laments Douglas W. Nelson, executive director of the Annie E. Casey Foundation, which tracks the economic status of U.S. children.
Even if all GOP cuts were adopted, programs for the elderly would still grow far more rapidly than any other segment of the budget. For the average couple retiring today, total health benefits alone are worth $230,000 in constant dollars, up from $65,000 in 1970. By 2010, as baby boomers begin to retire, the benefits under current law will be worth $350,000. The GOP plan would slow but not eliminate the growing imbalance.
Poor children and their parents won't see much relief from income tax cuts in the House version of the GOP proposals, either. That's because federal programs for the elderly are financed by a highly regressive 15.3% payroll tax levied on the first dollar in wages. This tax, which none of the Republican plans address, falls most heavily on the working poor and indirectly on poor kids, whose numbers have exploded in the wake of the single-parent-family boom and 20 years of declining wages among young fathers without college degrees.
The purchasing power of young families has declined, too, even as the wealth of the elderly has increased. In the early 1960's, the average consumption of 70-year-olds was 71% of the corresponding consumption of 30-year-olds. By the late 1980s, it was 118%.
GENERATION GAP. When today's children grow up, things won't necessarily improve. That's because their "generational tax burden"--the excess of taxes paid over entitlements received--is likely to rise sharply to help support the boomers. The vast majority of today's seniors will reap far more in government benefits than they paid in payroll taxes. But men who turned 40 in 1992 can expect to pay 34% more than they will receive in transfer benefits, according to Boston economist Laurence J. Kotlikoff.
Of course, eliminating the federal budget deficit, as the GOP promises to do, will help today's youth by not adding to their debt burden. But here, too, the GOP plan falls short, for it depends on continued borrowing from the Social Security trust funds to produce a balance on paper. When today's baby boomers begin hitting the shuffleboard courts around 2010, the trust funds will contain a massive $1.3 trillion worth of IOUs as a result of this borrowing. Guess which generation will be handed the bill?