Let's Get 'Unreal' to Stop From Drowning in Red Ink

By Maya MacGuineas

This post is part of our forum on Michael Kinsley's October cover story exploring the legacy of the Baby Boomers and what they owe the country. Follow the debate here.

Lisa Chamberlain dismissed as unrealistic Michael Kinsley's idea of re-jiggering the estate tax to collect trillions of dollars for the government that would otherwise go to the Baby Boomers. Probably true, but when it comes to fixing the budget, nothing other than "unrealistic" ideas will get the job done. The typical earmarks, waste fraud and abuse, and tax increases on the super rich discussions just aren't going to cut it.

Because we have continually punted on the long-term entitlement problems (which are no longer so far off), combined with the huge costs of the Great Recession, we are going to have to make some really major and difficult changes to the budget to avoid a dangerous debt squeeze. In the end, we will have to consider a long list of unrealistic choices and implement quite a few of them.

So broaden the estate tax? I like it (having long argued we should tax all inheritances the same as normal income; why after all should regular workers pay higher total tax rates on their wages than those lucky enough to inherit their money?) Scale back the home mortgage deduction along with the other trillion dollars in tax breaks that permeate the tax code? You bet. Put a freeze on discretionary spending? Absolutely. A new carbon tax? The time has come.

Can the Boomers Save America?

I like Kinsley's estate tax idea because it is innovative. I also think the Baby Boomers bear even more of the responsibility than Kinsley suggests. They were in charge for much of the period when Social Security and Medicare surpluses were used to finance the rest of government--everything from defense to transportation to interest on the debt--rather than being used to increase national savings to prepare for their expensive retirement, thereby allowing them to pay much lower taxes than otherwise would have been necessary.

And Boomers are about to become an even bigger part of the problem. The real fiscal threat is not from the debt we have already accumulated, but what the future holds since we have over-promised entitlement benefits to Boomers with no plan for how to pay for them.  And a real risk not even built into the projections is that Boomers will vote themselves even more benefits. Thus, it seems in order to focus on the Boomer generation for a large portion of the solution. (And as an X-er, I have no doubt we will still end up picking an even larger share of the tab.)

But I also want to bring up another idea that should be on the table: means-testing.

The universal structure of our largest social insurance programs--Social Security and Medicare--comes with a huge price tag. Together, at over $1.2 trillion this year, Social Security and Medicare will make up more than one-third all federal spending. Both millionaires and the poorest participants alike collect retirement and health benefits, regardless of need. Sure, benefits in Social Security are progressive in that low-income workers receive a greater share of their earnings, but nonetheless, well-off participants who need the benefits less actually receive the larger checks.

 

These programs are driving the future imbalances in the budget, and they will have to be changed. It only makes sense that benefits would be scaled back for those who need them least, while protecting (and hopefully even expanding) them for those who need the programs most.

 

Resistance to the idea of means testing has generally come from the belief that it is the universal design of social insurance programs that has created their popularity. Everyone can expect to get a check or health care benefits and thus, has a vested interest in seeing the programs continue.  "Programs for the poor are poor programs" is the bumper sticker thinking for this mindset.

 

But the concern is misplaced. Programs for the poor do receive broad-based support. The Earned Income Tax Credit and Medicaid have been two of the fastest growing programs in the budget in past years.  The threat to them is not lack of support from rich, self-interested voters, but the fiscal wall the budget is about to crash into.

 

A means-test could take the form of lower benefits in Social Security and higher cost sharing in Medicare for the well off. Or we could alter Social Security more fundamentally to provide flat rate benefits rather than ones that go up with income. Or to go even further, we could provide benefits only for those who need them. Changes could be based on lifetime earnings in order to avoid the incentive to spend down ones savings. Basically, any of these changes to varying degrees would change the programs from social insurance into real insurance, providing protections against low earnings and unexpected economic disruptions. In an era of excessive commitments and limited resources, a more targeted design for these programs makes an awful lot of sense.

Now, on a totally different note, I just have to say, I find the tone of Jamie's comments to be completely counter-productive (and these are the toned down ones?) Dealing with these problems is going to be tough and require sacrifice all around. There will be plenty of opportunities to duck the hard choices and demagogue. But if we don't shift the tone and nature of our national discussion away from criticizing and insulting those who are willing to put out ideas, to putting forth a variety of different solutions while having a civil and adult discussion about the trade-offs, we don't stand a chance.

Ok, climbing back down off my high horse. I offered my idea. Others offered there's. The Committee for a Responsible Federal Budget developed this Stabilize the Debt budget simulator so that anyone can come up with their own plan as well and jump into the discussion. The more ideas out there, the more likely we are to actually make some progress.  Now back to Capitol Hill where the discussion is focused on whether to add $3 trillion or $4 trillion to the debt by extending the tax cuts without offsetting the costs. Sigh.

The debate continues here.

This article available online at:

http://www.theatlantic.com/business/archive/2010/09/lets-get-unreal-to-stop-from-drowning-in-red-ink/63397/