Let's Pop the Deficit Bubble

By WILL MARSHALL

The U.S. Treasury recently reported that the federal deficit will hit a record high of $311 billion for the first half of the fiscal year, thanks in part to plunging corporate profits and revenues. The report was greeted with stifled yawns by official Washington. Similar indifference greeted the Social Security and Medicare trustees when they issued their annual spring warning about an even bigger fiscal time bomb: exploding entitlement costs.

The trustees are used to being ignored, but this year's warning is more serious than ever: In 2008, the oldest of 77 million baby boomers will reach the age of eligibility for Medicare and Social Security. It is the beginning of an unprecedented demographic surge that threatens to overwhelm the nation's finances if we don't act, and soon.

To this end, members of the Brookings-Heritage Fiscal Seminar, a nonpartisan group of 16 federal budget and policy experts, of which I am member, have hammered out an innovative plan for averting a fiscal meltdown. The basic idea is simple: Take entitlement spending off auto-pilot, and establish a fixed, overall budget for the programs.

Political leaders, we say, can no longer afford to let the big entitlement programs grow automatically each year, with no deliberation by Congress, no pressure to reconcile spending and revenues, and no attempts to make trade-offs among competing public priorities.

When it comes to entitlement reform, the future is now. In the report, "Taking Back Our Fiscal Future," we say: "Our political leaders have been avoiding this enormous issue – largely because it requires that the public be told that not all past promises can be met. Our group has come together, from diverse points on the political spectrum, to sound an alarm: if America is to remain strong, such evasions must end."

The best solution, of course, would be for the next Congress and president to agree on ways to reform Medicare, Medicaid and Social Security so that they continue to provide health and retirement security without running up massive deficits. But our highly polarized political class is a long way from consensus on how to modernize the nation's biggest and most popular social insurance programs.

In truth, we aren't there either. So what we propose instead is essentially a stopgap – a way to prevent automatic entitlement spending from devouring the federal budget while elected officials summon the courage to act.

The plan, conceived by Gene Steuerle and Rudy Penner of the Urban Institute, works like this: Congress and the president enact explicit, long-term budgets for Medicare, Medicaid and Social Security. With this one step, entitlements would be forced to compete for budget dollars with other vital national priorities.

Either the trustees or the Congressional Budget Office would review the programs at regular intervals, possibly every five years, to determine whether they stay within their budget. Failure to do so triggers automatic adjustments in benefits, premiums, provider payments, or tax revenues.

Of course, Congress could override these adjustments – but it would have to take explicit action to jettison fiscal constraints. This is preferable to its current passivity in the face of automatic, formula-driven spending growth.

Amazingly, discretionary programs, including defense, now constitute only 38% of all federal spending. Our proposal would end the ever-narrowing scope of congressional decision-making, and fully restore lawmakers' constitutional power of the purse.

Congress has imposed disciplinary mechanisms on itself before. The budget caps adopted in 1990, the Military Base Closing Commission, and the 1983 Social Security Commission led by Alan Greenspan are all instances in which Congress recognized the need to establish procedures that provide members political cover for unpopular decisions.

Our idea for budgeting entitlements thus reverses the "Doomsday Machine" logic of automatic entitlement spending, calling instead for the automatic tax and spending adjustments necessary to keep the programs solvent. And if the composition of our group is any guide, it could have broad, bipartisan appeal. Meeting under the auspices of the Brookings Institution and the Heritage Foundation, the gang of 16 includes prominent liberals and conservatives from eight Washington think tanks, as well as no less than three former directors of the Congressional Budget Office: Mr. Penner, Alice Rivlin and Robert Reischauer.

What unites us is fear of what unsustainable growth in entitlement spending portends. Conservatives worry that taxes on working families will have to rise to crippling levels to pay for the promises made to retirees. Progressives want to prevent automatic entitlement spending from squeezing out space in the federal budget for such vital public investments as educating the young, fighting poverty, protecting the environment, keeping our military strong, and modernizing our energy and transportation systems.

Inaction in the face of the looming budget crunch is not wise. Putting entitlements on a fixed budget will, we hope, set the stage for the long-overdue debate over how to ensure that our venerable social insurance programs continue to serve future generations of Americans.