Wednesday, February 17, 2010

How the Supreme Court Helped Balance the Budget

Copyright, The New York Times Company

Social Security and Medicare combined already spend over a trillion dollars a year but, under current law, are projected to spend much more than that as the Baby Boom generation retires. For many years, I have expected that laws would change in the direction of levying more taxes, but a couple of recent political developments suggest that benefit cuts are real possibilities.

Over the years, Baby Boomers have expressed concern that, thanks to their large numbers, the government would be unable to afford the same pensions and medical care that earlier generations of retirees enjoyed. However, economists have always pointed out that the same benefits could be afforded merely by raising the payroll tax a couple of percentage points.

Right now the combined employer and employee payroll tax for Social Security and Medicare is about 15 percent of payroll under the earnings limit. The 18 or 19 percent rate needed to pay for the Baby Boomers’ retirement would depress the economy a percentage point or so, but would still be far below the payroll tax rates of 40 percent or more that prevail in many European countries.

Indeed, much of Europe has already seen its population age to a degree that is still decades in the future for the United States. This means many European governments have more retired people to support. What’s more, they have also begun spending more money per retired person.

It seems that retired people have been a successful political force around the world, and as their numbers grow they only get more successful. Their political success even seems to extend beyond democratic governments, as a number of public pension programs were installed and generously expanded by dictators in Chile, Spain and the Soviet Union, to name a few. For some reason, the political voices of the young are not so easily heard.

In our own country, both Democrats and Republicans have spent generously on retired people. The Social Security program was created under Franklin Roosevelt. Most recently, President George W. Bush significantly expanded the Medicare program to cover prescription drugs.

These are some of the reasons I have long suspected that more government support for the retired was on the horizon, to be financed by higher payroll taxes. But three things happened in the last 18 months that might make benefit cuts politically viable.

In 2008, the housing and stock markets collapsed, which will likely delay many retirements, and thereby reduce the number of years that Baby Boomers are ultimately retired. In other words, the ranks of the retired may not grow as much as we once thought.

President Obama’s election, also in 2008, was another important event. Although Democrats and Republicans vigorously debate his policies, they all admired (and will attempt to imitate) his fund-raising acumen. As The New York Times wrote that year, “Obama Recasts the Fund-Raising Landscape.” In particular, the Obama campaign took advantage of technology and young people to help gain victory.

The AARP has long fought for campaign finance limits. Thus, the recent Supreme Court rejection of government bans on corporate spending in elections was another notable change in the political landscape.

With slower growth of the retired population, politically active youth and businesses freer to spend cash on campaigns, it is actually credible that businesses and young people might inflict noticeable political damage on a candidate who aims to pay for retirements with higher taxes, and help defend a candidate who considers Social Security or Medicare benefit cuts.

No comments: