by Mitt Romney
Today we find ourselves at a very different moment in history, and I fear that if we remain on our current track, history will come to know us as this nation’s worst generation—because we will force our children and their children to bear the brunt of our recklessness and the willful neglect of the problems we created. The problem is so deep-seated that relatively few of us in the postwar boomer generation even understand at a basic level how we are compromising future generations. If we did, I’m convinced that we would do whatever it takes to set things right.
Gail Sheehy observed in her book Passages that as people age, the issue of what they will leave behind as a personal legacy becomes vitally important. Right now that legacy is looking grim indeed, in large part because politicians and the leaders of special-interest groups have purposefully and consistently over many years hidden the truth from us.
Avoiding the fate of becoming the worst generation won’t be easy, particularly given how long we’ve been on a collision course with debt and decline. But I’m convinced it will be worth it if we face this stark truth: The debts and financial obligations we are on track to leave the next generations will be so huge that they will preclude our children from achieving the American dream. Never before has there been a generation of Americans that has imperiled the following generations’ opportunity for achievement and advance as we have done. And America’s ability to preserve individual freedom and the nation’s security is also in jeopardy, because unless things dramatically change, our debts and obligations will imperil our economy and our military—not because of fierce foreign competitors or the need to engage enemies militarily, but simply because of our own woeful negligence.
The Entitlement Nightmare
The term entitlement is one of those bits of government jargon that everyone has heard, but only some people understand. In simplest terms, an entitlement is considered to be a guarantee of access to government benefits by right or by agreement through law. Almost everyone is familiar with Social Security; the other two of the so-called Big Three entitlements are Medicare and Medicaid. Medicare is a health-insurance program for seniors and certain disabled people provided by the federal government and partially funded by payroll taxes and shared premiums. Medicaid is a health-insurance program for the poor and disabled. While we think of Medicare as the health program for seniors, Medicaid is actually the program that covers the elderly poor when they need the long-term care of a nursing home. On average, and in normal economic times, Medicaid is funded about 57 percent by the federal government and the remainder by the individual states. But the ratio between federal and state Medicaid spending isn’t the same for all states; some, like Massachusetts, pay 50 percent of total Medicaid costs, while others, like Tennessee, pay 40 percent.
These three entitlement programs create a safety net for seniors and citizens who are poor or have special needs. But they have become immensely expensive. President Franklin D. Roosevelt signed Social Security into law in 1935 as part of his New Deal, but even he would be surprised to see how much it has grown. In his book Running on Empty, former commerce secretary Peter G. Peterson explains that Roosevelt’s original Social Security program has spawned a gigantic federal benefit system that is 50 percent larger, as a share of today’s (vastly larger) GDP, than the entire federal government was at the height of the New Deal. Social Security grew exponentially as Congress in the 1950s and 1960s added more and more benefits to the original program.
But when it comes to benefit expansion and out-of-control growth, Social Security doesn’t hold a candle to Medicare. When Medicare became law in 1965, President Lyndon Johnson estimated that it would cost American taxpayers only about 500 million dollars annually. But in 2010, total Medicare costs are projected to approach 500 billion—almost a thousand times larger than what it looked like to President Johnson.
Medicaid became law during the final weeks of the Medicare legislative process. Projections were that it would cost less than 250 million by the time all fifty states had implemented the program. That figure was exceeded when only six states had done so. Since then, Medicaid growth has far outpaced the expansion of our overall economy because of dozens of congressional expansions and additions to the original program.
At present, the total cost of U.S. entitlement programs accounts for more than half of all federal spending. Combined with the interest payments on the national debt, so-called mandatory spending is over 60 percent of all federal spending. Entitlements consume more than 11 percent of our entire economic output, while the defense budget, by way of comparison, is less than 4 percent of our GDP.
Because entitlement spending grows so quickly—much faster than either the GDP or total federal tax revenues—it effectively crowds out spending on other priorities. State governors have to deal with only one of the entitlements, Medicaid, but I can report that one is more than enough. When I became governor of Massachusetts, the first time I met with my cabinet members to begin drafting a budget, my secretary of health and human services brought charts that outlined massive projected growth in our Medicaid spending. He noted that when it came to Medicaid, we had no choice in the matter: It was federally mandated. One of the other cabinet secretaries quipped, So I guess all the rest of us will simply preside over permanently shrinking agencies.
He was right. We began to refer to Medicaid as Pac-Man, because it grew more than twice as fast as our state tax revenues, eating its way through everything else in the budget.
Because of the disproportionate growth of the big-three national entitlements, this Pac-Man effect is even more pronounced at the federal level. The General Accounting Office calculates, in fact, that entitlement spending and interest will constitute more than three-quarters of all federal spending within a single decade. By mid-century—if tax rates remain unchanged—entitlements alone would consume all other government spending. Nothing would be left for national defense, infrastructure, medical research, education, science, or anything else. Nothing.
But that won’t happen, of course. Instead, there will be a campaign to raise taxes by a massive amount. Today payroll taxes totaling 15.3 percent cover the cost of entitlements. To keep pace with the projected growth in entitlement spending, the tax would have to more than double by mid-century, then rise to 44 percent after that. That would make the federal tax rate for entitlements alone greater than the combined rate of all federal taxes we pay today!
Our grandchildren would watch helplessly as 44 percent of their total earnings were taken simply to maintain mandated Social Security, Medicare, and Medicaid payments to their grandparents and parents. Given the scale of this tax burden, only a very few of them could expect to earn enough to buy a home or to build a business. Their total federal tax burden would far exceed half of what they earn. In practical terms, America would cease to be the land of opportunity. The American dream would be over.
The Political Shell Game
This untenable outcome is the simple result of promising ourselves the moon—not directly, but through commitments imposed on future generations that were made in our behalf by the men and women we have elected to office. I can’t imagine that we would have done this intentionally. How is it that we didn’t know? Most Americans are aware of the budget deficits, the national debt, and our trade deficit, but this entitlement nightmare has been virtually unnoticed by our generation, or by the ones who will be stuck with it.
Part of the problem is that the federal government has a habit of hiding its long-term liabilities. It publishes the equivalent of an annual budget, but it doesn’t publish a balance sheet. In the private sector, anyone who wants to understand how healthy a company is begins by looking at two reports. The income statement shows the company’s annual profit or loss, but that doesn’t tell the whole story. If a hypothetical business made a 10 million profit last year, is it healthy? Perhaps, but you’d want to learn more. If its balance sheet shows oversized debt and undersized equity, it may not be so healthy. Enron was very profitable until
it collapsed. So were Lehman and AIG. So have been a great number of now-bankrupt companies. The balance sheet tells a good deal about the rest of the story.
If the federal government published a balance sheet—just as it requires public companies to do—it would be forced to show its entitlement liability. And if it amortized that liability, it would also appear in the annual budget. We would see it, we would talk about it, and we would be more likely to do something about it. But the politicians keep it well hidden instead.
Washington politicians have also perfected the use of another budget trick to hide their excesses. All new bills are scored—which means evaluated for their impact on the budget—based upon their cost to the federal budget over only the next ten years. So when proponents of a big entitlement expansion of some kind draft their legislation, they are careful to make sure that the major financial impact doesn’t hit until eleven years out. That way, the cost won’t even be considered.
A case in point is a measure being considered in 2009—called CLASS—that proposes to provide long-term care insurance for seniors. Individuals must pay premiums for five years to qualify for the program, so benefits won’t start until at least five years out, and even at that point, they will initially be paid to only a small portion of the people who are in the program. Thus, when the bill is scored over ten years by the Congressional Budget Office, it looks like it makes money. Of course everyone knows it will cost an enormous amount over the long term. Ironically, and outrageously, CLASS is proposed as part of the Democratic health-care reform program as a source of funding.
Hiding long-term liabilities makes sense for politicians with short-term goals, like reelection. It allows them to give big gifts to their friends, donors, or special-interest groups without the public at large becoming aware of them. When I ran for governor, for example, I paid a visit to the firefighters’ union to pitch for its support. Union leaders had endorsed Massachusetts’s two prior Republican governors, so I imagined I could count on them as well. During the meeting, I discussed at length my commitment to fire safety, low taxes, interoperable communication systems, and a range of issues that I supported and knew the union supported as well, but the union representatives in attendance appeared entirely unmoved.
Finally, I got the big question from the union leadership: Would I support 25-75? Someone had to explain that it was shorthand for a proposed state law mandating that after twenty-five years of service, firefighters could retire and receive annual pensions that would equal 75 percent of the average of their highest three years of compensation, plus inflation—a pension that would be paid regardless of whether the retired firefighter got another job, even another job in state government.
I did a quick calculation. A firefighter who was hired at twenty years of age would retire at forty-five, then be paid for the remaining thirty years of his or her life expectancy, plus receive health-care insurance. The state would actually pay this person more during retirement than he or she had earned during their years of employment. It made no sense—not just the money, but also the notion that a public employee could retire at forty-five with a full pension. I declined to offer my support for 25-75. It would have been very easy to say yes and win the union’s support because the cost to the state wouldn’t have become significant until many years after I’d left office. It wouldn’t show up on my budget, and because we don’t publish a balance sheet, it may have hardly been noticed.
Something similar has gone on for decades in other political campaigns, in statehouses, and in Washington. Lobbyists for seniors, for example, justify their own large salaries based on what they get from government, and they explicitly or implicitly offer their considerable support to those politicians who agree to pile on obligations that bring benefits to older Americans. Today that same highly sought-after support goes to those office-seekers who agree not to disturb the mound of entitlement obligations already in place. And because those obligations are well hidden, it’s easy for politicians to comply.
Some politicians are able to convince themselves that they are doing the right thing when they ignore looming problems like entitlement finance. In public, they mount elaborate and specious arguments meant to discount the extent of the problem, but in private, among friends, most will admit the truth. The combination of compelling short-term political self-interest and a veiled means of delivering a favor to key special interests in order to get a favor down the road are irresistibly potent for many in public life. These are not criminal transactions. They are not the sort of bribes we see hit the front pages. But they are insidious incentives to act contrary to the interests of future generations of Americans, and their enticing power goes a long way toward explaining how we have reached this point. The public generally has no idea that politicians acquiesce to such things as excessive public-union pensions and runaway entitlement growth, leaving the coming unsuspecting generations to suffer the consequences of this political hide-and-seek.
The entitlement liability can be rectified, and the first step is to create public awareness that pushes the issue to the front burner. That will require political leaders who believe that their next election is less important than their children’s future to speak out. It will also require able and relentless investigative voices in the media to refuse to let candidates off the hook who do not confront this issue. Prior to the 2008 economic collapse, there was reason to be hopeful that these voices would emerge. But the turbulence and uncertainty surrounding the financial crisis may keep the entitlement emergency in the shadows, allowing politicians to continue to ignore it for a while longer. Unfortunately, President Obama has done nothing in his first year in office to call attention to this looming crisis or to advance any solutions.
As noted above, public awareness would certainly grow if we required the federal government to publish a national balance sheet and to annually amortize its long-term liabilities. It would help make the voting public—and particularly those young Americans just entering the workforce—aware of what awaits them if we don’t take a different course. And it would mean that new programs and entitlements would be evaluated not just on their effect over the next few years, but over their lives. I suspect, for example, that if former president George W. Bush would have had to declare the actual balance-sheet impact of his Medicare Part D prescription-drug program—now estimated to be approximately 8 trillion—it would not have passed. Politicians love to talk about transparency and accountability, but when they do, they are rarely referring to themselves. The time has come for that to change.
In 2008, the liberal Brookings Institution and the conservative Heritage Foundation joined forces to recommend that our elected officials stop considering all entitlement spending as mandatory and automatic, because it is not, after all. Congress and the president have the power to appropriate spending as they see fit, even for so-called mandatory programs like entitlements. The two cooperating think tanks called for the creation of an annual budget for these programs, a performance review of each to determine whether it was effective and on budget, and extensive analysis and debate before it is funded. They concluded that automatic spending in these programs is preempting the policy discussion we should be having about our national priorities and how they should be funded. . . . From diverse points on the political spectrum, [we] sound an alarm: if America is to remain strong, such evasions must end.
Another fiction that’s often used to obscure the extent of the crisis is the so-called Social Security Trust Fund, which the American public is assured has a large positive balance composed of U.S. treasuries. Yet it is not a fund in the conventional sense of the word. From the fund’s inception, money collected from payroll taxes hasn’t been locked away, but rather has been used to pay the benefits of current beneficiaries. When payroll taxes for a given year have exceeded that year’s Social Security payout, those excess funds have been immediately made available for the rest of the government’s spending. There simply is no fund safely invested somewhere that w
ill reduce the specter of our children facing ever higher taxes, and therefore entitlement programs will consume an ever larger share of our economic output. There is no fund, and there is no silver bullet.
To put it in a nutshell, the American people have been effectively defrauded out of their Social Security. In 1982, the government raised Social Security taxes with the intention of creating a surplus that could be set aside in some fashion for the baby boomers when they retired. But for the last thirty years, the surplus has been spent, not on retirement security, but on regular budget items.
Let’s look at what would happen if someone in the private sector did a similar thing. Suppose two grandparents created a trust fund, appointed a bank as trustee, and instructed the bank to invest the proceeds of the trust fund so as to provide for their grandchildren’s education. Suppose further that the bank used the proceeds for its own purposes, so that when the grandchildren turned eighteen, there was no money for them to go to college. What would happen to the bankers responsible for misusing the money? They would go to jail. But what has happened to the people responsible for the looming bankruptcy of Social Security? They keep returning to Congress every two years.
It is important to conduct the entitlement discussion without scaring our senior citizens, which is why the reforms that are necessary must be made concurrent with guarantees to our elderly that their benefits will not be slashed and the promises they relied upon will not be broken. They are worried already because they are more aware of the enormity of the entitlement problem than the rest of us—candor will be the best assurance we can give them that the solutions will not be crafted with them as targets.
Sustainable Entitlements