February 10, 2004

Unsustainable spending will force tax increases

Bruce Bartlett on federal spending and future tax increases:

I believe that taxes will probably rise by an amount at least equal to the projected rise in entitlement spending. The two largest components of this are Social Security and Medicare. President Bush talks a great deal about the need to reform Social Security, but the budget makes clear that Medicare is in far worse shape and in much greater need of reform. Spending for Social Security is only projected to rise from 4 percent of GDP to 6.8 percent in 2080. But Medicare is projected to rise from 2 percent to more than 12 percent over the same period.

We can assume that a rise of 10 percent of GDP -- over $1 trillion per year in today's economy -- is the absolute minimum increase we can expect for Medicare. Projections of Social Security tend to be fairly accurate because they are driven mainly by demographics. But spending for Medicare is much harder to predict because the cost of medical services has risen sharply over time. The original estimate of Medicare spending after 25 years when the program was established in 1965 was low by a factor of 10.

The addition of an expensive new unfunded benefit to Medicare for prescription drugs means that future spending will be much, much greater than projected. When people are given something that is heavily subsidized, they use a lot more of it. Consequently, we can expect drug spending by the elderly to rise very rapidly, especially since drug prices are also likely to rise as demand outstrips supply.

The budget itself admits that these trends are "unsustainable." Since Congress will never reduce benefits to retirees, the only way to make the trends sustainable is by raising taxes significantly.