Obama’s Budget Includes Only Timid Entitlement Reforms – Dramatically Different Demographics Require Serious Restructuring – But Fear Of Political Backlash Prevents Action

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By Paolo von Schirach

April 11, 2013

WASHINGTON – Let’s keep this simple, Obama’s latest budget proposal indicates that this President has essentially given up governing. His focus is instead on hinting at meaningful entitlement reforms, without however putting a real plan on the table, with the goal of creating confusion and hopefully divisions in the Republican camp. Only in this diminished, timid and politically parayzed Washington can one take seriously mild measures aimed at slowing down –by a tiny bit, mind you–  the run away cost growth of Social Security benefits. This is tweaking –at best.

A major problem

Obama has got a big, in fact historic, problem –the systemic and unstoppable growth of major entitlement programs– and no serious plan to deal with. Let’s be clear: Obama did not create this problem. Just like other Presidents, he inherited it. In his case, managing this gigantic and growing fiscal shortfall has been made a lot harder by the impact of the 2008 financial crisis and the consequent recession that he also inherited.

Leadership?

That said, Obama is the CEO. It is up to him to lead. And he will not do it, simply for fear that any “real” –as opposed to cosmetic– plan to solve the entitlement crisis would be too unpopular. In fairness, supposedly fiscally conservative Republican George W. Bush did not nothing on this score, absolutely nothing. If anything, he messed things up quite a bit by engaging in ill advised and extraordinarily costly wars that simply made a bad fiscal picture a lot worse.

Changed demographics

But why are we now in this mess? It is rather simple. Well intentioned entitlement programs aimed at shoring up the finances of low income older Americans, while at the same time paying for most of their medical cost, were designed and approved in a different era, with different demographic trends. In those days, a large pool of active workers paid into funds that would then be used to distribute benefits to a relatively small numbers of retirees who (according to then accurate actuarial projections) would have only a few more years to live.

Well, none of those assumptions are true any more. All major industrial democracies, including the US, have experienced significant (in some cases, like Japan, dramatic) fertility rates declines. In the aggregate, this means that each year there are fewer and fewer active people supporting a lrger and larger number of  retirees. Indeed, owing to medical care improvements, retirees live much longer. To make matters worse, some live longer while suffering from chronic and very costly old age related diseases, like dementia.

Unchanged programs

In the meantime, the structure of major entitlement programs has remained pretty much the same. And so you get the picture. Programs that were supposed to provide a measure of support for a relatively small number of seniors and only for a few years, now have become gigantic and ever growing monsters that dominate federal spending.

The solution? Well, the solution is quite simple: restructure these programs so that full eligibility will be restricted to the truly needy, while raising the eligibility age, taking into account of the fact that people today live much longer. As far as today’ s young people –tomorrow’s retirees– are concerned, change the system. Create private savings accounts that will not require federal programs. The notion that the Federal Government can provide generous income support and medical care benefits to all is just no longer viable. Period.

Who will tell the truth?

As I said, the solution is quite simple. But there is no stomach on the part of any elected leader to level with the American public and finally “tell the truth”. And this is largely because these income support programs over time  morphed into entitlements and are now viewed as birth rights. This is why George W. Bush did not touch them. This is why Barack Obama stayed away from the pragmatic and sensible recommendation of his own “Debt Commission” that included much of what I what sketched above.

If the best that can be done is coasting, with some minor tweaking here and there  –looking at his proposed budget, this is Obama’s preferred course of action–  then the message is that we, as a Nation, are bent on “kicking” the proverbial “can down the road” for a few more years. It is obvious that at some point not even the mighty United States will have the residual credit that will allow endless borrowing at ridiculously low interest rates to fund manifestly unaffordable entitlements.

But, hey, we are not at the end of the road –yet. So, let’s pretend that all is well, and hope that some miracle will deliver us from the impending nightmare. What do you think? A good enough strategy?

 

 

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