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Drugs for the Elderly . . . and taxes for the children.

by Chris Edwards

June 24, 2003

Chris Edwards is director of fiscal policy at the Cato Institute.

In just five years, a demographic tidal wave will begin that will
forever alter the federal government. The large baby boom generation will
start retiring and cause the costs of Social Security and Medicare to
explode. Unfortunately, Congress seems blissfully unaware of the coming
crisis as it works to create another elderly entitlement in the form of a
$400 billion Medicare prescription-drug benefit.

Ironically, many in Congress support an expansion of elderly
entitlements, but also claim to be champions of children's interests as
well. But children, as tomorrow's taxpayers, will be the losers as the
costs of unreformed elderly programs balloon. Even before a new drug
benefit is added, Social Security, Medicare, and Medicaid spending will
almost double as a share of gross domestic product by 2040. Federal
spending will be pushed up from 19.9 percent of GDP to at least 27.1
percent. That 36 percent expansion in the government's share of Americans'
income will come at the expense of today's children when they become
middle-aged taxpayers.

Suppose that such a government expansion were thrust onto taxpayers
today. It would amount to a $778 billion annual tax increase — that's more
than seven times the size of President Bush's income-tax rate cuts. But
even that is an optimistic scenario if Congress continues to add new
spending programs to the federal empire. Congress loves new programs
because they provide talking points for pandering politicians.

The new drug program is a case in point. It makes no budget sense to
create a new elderly entitlement because of the large federal deficit and
the looming financial crisis in Medicare. If Medicare were truly reformed
with drug costs offset one-for-one with cuts elsewhere, it would make
sense. But if Congress simply dishes out more taxpayer money, gray-haired
voters will be empowered to demand even more from presidential campaigners
next year.

The fiscal problems faced by young Americans in the future will be
exacerbated by out-of-control discretionary spending. Even aside from
defense spending, discretionary spending has grown at 8.2 percent a year
over the past five years. If it continues growing at that rate, it will
swallow a growing share of the nation's resources since nominal GDP is
expected to grow at just 5 percent a year in coming years. In that case, a
36 percent expansion in government by 2040 looks optimistic unless
Congress gets serious by spending cuts.

If young Americans want to enjoy the same economic freedom and
prosperity that the baby boomers have enjoyed, they will have to pressure
Congress to cut both elderly programs and spending in general. There is no
shortage of ideas for sensible reforms. For discretionary spending,
programs such as education, housing, and highways should be terminated,
privatized, or transferred to the states. Such cuts sound radical today,
but they won't a decade from now when escalating entitlement costs are
putting a squeeze on every other part of the budget.

For Medicare, beneficiary premiums should be increased as costs rise
over time, rather than the added costs being foisted on working people
through higher taxes. After all, the elderly are much better off compared
to the young than they used to be. For example, the average elderly person
used to consume less than the average young person, but the reverse is
true today. Indeed, research has found that, on average, a majority of the
elderly's income today is financed by the young through government
transfers. A new drug subsidy will make those intergenerational transfers
worse.

Tax-funded entitlement programs sounded like a good idea to many when
initiated. But they have set up a "war between the generations" in the
21st century. At the signing ceremony for the new Medicare program in
1965, Lyndon Johnson said that "no longer will young families see their
own incomes, and their own hopes, eaten away simply because they are
carrying out their deep moral obligations" to provide for their parents.
Yet young families will see their hopes eaten away in the future from
taxes to pay for elderly entitlements unless they are reformed.

This article originally appeared in NRO on June 24, 2003.

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