As boomers age, a soul-searching budget battle

By Emily Kaiser

WASHINGTON (Reuters) – In 1983, a civil servant named Robert Ball worked a political miracle: he convinced Republican Ronald Reagan to raise taxes and Democrat Tip O’Neill to accept trims to Social Security.

That was the last time the United States made substantial changes to shore up the finances of its public pension and healthcare programs, which will cost an estimated $1.3 trillion this fiscal year and $2.3 trillion by 2021 as tens of millions of baby boomers retire.

Keeping those boomers healthy and out of poverty poses the biggest threat to long-term U.S. finances, and figuring out how to pay for it will be an epic political fight. Federal Reserve Chairman Ben Bernanke calls the fiscal problems a “near and present danger” to the U.S. economy.

Any changes to retiree benefits will require some national soul-searching and uncomfortable debate over what society owes its elderly citizens, particularly if meeting those obligations means short-changing younger people.

Back in 1983, Ball’s diplomacy averted an imminent crisis. Social Security was months away from missing benefit payments, and the National Commission on Social Security Reform — known as the Greenspan Commission — was deadlocked.

There is no such pressing crisis today, but the longer-term fiscal problems are far more severe. Healthcare costs are rising faster than inflation, and Americans are living longer.

Even in 1983, it was obvious that Medicare, the healthcare program for seniors, would ultimately become the bigger financial burden. But the Greenspan Commission decided to focus only on Social Security.

“Trying to do both could mean we would do neither,” Alan Greenspan, who chaired the 1983 commission before becoming Federal Reserve chairman, said in an emailed response to questions from Reuters.

“While the impact of the pending retiring baby boomers on Medicare was clear in 1983, we knew that policymakers had decades to address that problem. Of course, they didn’t.”

HISTORY REPEATS

Nearly three decades later, the battle rages on, and the arguments haven’t changed much. Republicans want spending cuts and Democrats insist on tax increases, a divide that has doomed every major reform effort to failure.

Since Greenspan’s group wrapped up its work, two other bipartisan presidential commissions have tried to finish the task. Erskine Bowles, the Democrat who co-chaired the latest deficit commission under President Barack Obama, called the looming fiscal mess the most predictable crisis in U.S. history.

Yet his group suffered the same fate as Greenspan’s, breaking down largely along party lines. Only 11 of the 18 members voted in favor of the commission’s plan, which would cut the federal deficit by $3.9 trillion over the next decade.

Unlike 1983, there is no obvious candidate to assume the shuttle diplomacy role played by Ball, who died three years ago. Obama has offered only lukewarm support for the deficit commission’s findings.

Backing in Congress comes primarily from a bipartisan group of lawmakers known as the “Gang of Six.” But they face stiff opposition from within their own parties and are far from mustering enough votes to pass legislation based on the commission’s recommendations.

Republicans brought out their own long-term budget proposal on Tuesday, which included major changes to Medicare and Medicaid, the healthcare program for the poor. But the plan drew swift complaints from Democrats, who said it would leave the elderly and children vulnerable to rising healthcare costs.

The longer the United States waits to address the financial strains of an aging population, the tougher the choices become. But without an immediate crisis to focus the mind, there is little incentive for lawmakers to act — particularly when the decisions are certain to anger some voters and there’s always an election just around the corner.

“Fiscal policy cannot be put on a sustainable path just by eliminating waste and inefficiency,” said Douglas Elmendorf, director of the Congressional Budget Office. “The policy changes that are needed will significantly affect popular programs or people’s tax payments or both.”

There are now 2.9 workers per Social Security beneficiary, according to the Social Security Administration. By 2035, that figure drops to 2.1 workers apiece. The CBO estimates the number of Medicare enrollees will grow to almost 60 million by 2021, from 45 million in 2010.

In 10 years’ time, Medicare and Social Security spending alone will amount to 9.6 percent of U.S. gross domestic product, more than defense and other discretionary spending combined, CBO projections show.

TIMING IS EVERYTHING

The aging of the 76 million-strong boomer generation, born in the years following World War Two, comes as no surprise.

What was unexpected was that the retirement wave would crest so soon after the worst financial crisis and recession in the boomers’ lifetime, one that drove unemployment to a 28-year high and wiped out trillions of dollars in household wealth.

The recession — and the hundreds of billions of dollars the government spent to prevent it from becoming a depression — worsened an already grim budget picture.

Judging from this year’s battle in Congress over cutting a relatively modest $61 billion in discretionary spending, the looming fight over trillion-dollar programs will be bloody.

Congress sets one-year budgets and spins through two-year election cycles, but the needed fiscal fixes will span decades. That makes it difficult to separate today’s political considerations from tomorrow’s economic imperatives.

“We’re going crazy about $61 billion, ‘Oh my God, it will devastate the country!'” said Michael Tanner, a senior fellow at the libertarian Cato Institute. “How are we going to make the big cuts?”

As boomers age, a soul-searching budget battle