America's Stark Fiscal Choice
What do you want, entitlement reform or more tax cuts? While President Bush's soaring campaign rhetoric promises Americans that they can have it all -- new and expanded tax credits for private health, savings, and retirement accounts plus big permanent tax cuts -- the reality is beginning to bite. The cost of these ambitious plans, on top of committed expenditures for the new Medicare drug benefit, the war in Iraq, homeland security, agriculture, energy, highways, education, and more, will add trillions of dollars to a federal budget deficit already spinning out of control. Responsible Republicans are beginning to say that Bush must make a choice between his radical plan to change Social Security, health care, and savings programs and making his first-term tax cuts permanent. The wise choice would be to go with entitlement reform. America is facing a severe crisis as its health-care system cracks and the baby boomers approach retirement. The oldest hit 62 in just four years, and many will then begin to draw on Social Security. Three years later, in 2011, they will be eligible for Medicare. Time is running out.
The need for a choice becomes clear when the numbers are run. The latest budget estimate by the Congressional Budget Office projects deficits of $2.3 trillion over the next 10 years. That assumes all of the tax cuts on income, estates, capital gains, and dividends passed in the first Bush term expire as scheduled. If they are made permanent, deficits surge to $3.6 trillion through 2014. Add in the $1 trillion to get rid of the onerous alternative minimum tax, and the budget deficit soars close to $5 trillion over the next decade.
These dismal figures don't include the entitlement reforms proposed by the President. Health savings accounts, perhaps his best idea, encourage companies to offer employees 40l(k)-style tax advantaged accounts if they accept high deductible catastrophic health insurance. Employees can contribute up to an amount equal to the deductible (at least $2000 for a family) with the money going to pay day-to-day doctors' bills. If it isn't spent, the money rolls over year after year. Bush is proposing to sweeten HSAs by allowing individuals to take a tax deduction for the share of the premiums they pay to buy high-deductible coverage. The self-employed who set up HSAs and buy their own catastrophic insurance can deduct the full premium. But HSAs come with a price -- lost tax revenue of up to $30 billion over ten years. And proposals for lifetime and retirement savings accounts would cost billions of dollars in the long run.
Reforming Social Security, high on the Bush list of entitlement reforms, comes at a higher price. While there are differing opinions over how fast Social Security will run out of money, Federal Reserve Chairman Alan Greenspan believes that unless actions are taken soon to deal with Social Security and Medicare, the deficit will worsen dramatically. Bush's solution, to shift two percentage points of the 12.4% payroll tax into private retirement accounts, may benefit the young, but it would cost the Treasury $1 trillion to $2 trillion over 10 years, as the government pays its obligations to older retirees.
It is disingenuous of President Bush to run on this kind of fiscal folly. Add up all the promises, and you generate deficits up to $7 trillion, $8 trillion, or $9 trillion over a decade -- a crushing legacy for our children and grandchildren. It's time for real choices to be made.