The Other Deficit

Washington needs to fix the budget's generational imbalance.

With congressional Republicans and the White House stuck in familiar disagreements after the release of President Obama's latest fiscal blueprint this week, the first step out of the impasse may be to recognize that the federal budget faces two distinct imbalances. The first is the gap between revenues and expenditures that produces unsustainable deficits and debt. Less recognized, but also threatening, is the budget's increasing tilt toward consumption over investment and toward seniors over children.

A group of retired seniors gathers at the Brighton Gardens Assisted Living residences in Bethesda, Md., to watch the final presidential debate between Barack Obama and John McCain on Oct. 15, 2008. (Tim Sloan/AFP/Getty Images)The two sides might find more common ground on that second imbalance. And addressing it could create more momentum to tackle the first. Since the 1960s, the federal budget's focus has radically shifted toward current consumption and away from investment in future generations. In 1969, the Office of Management and Budget classified 31 percent of federal spending as investments—including infrastructure, scientific research, and education and training—and an equal 31 percent as payments to individuals. By 2014, payments to individuals had soared to 72 percent of federal spending, and investments had plummeted to 13 percent, the smallest share ever recorded.

The federal government provides payments to individuals all across the age spectrum. But Social Security, Medicare, and Medicaid—the central strands of the retirement safety net—represent the biggest costs. By 2011, the latest year for which figures are available, Washington's spending on seniors represented an amount equivalent to 7.5 percent of the nation's total economic output, the Urban Institute has calculated. That dwarfs the 2.1 percent of economic output Washington spent on seniors in 1960—or the 2.5 percent it spends on children today.

Demography partly explains the budget's gray streak. The number of seniors has more than doubled (to 45 million plus) since 1965. But decades of policy choices, starting with the decision that year to create Medicare and Medicaid, contributed by creating a more comprehensive retirement safety net. That has provided generations of seniors with more security and dignity. But Washington now spends nearly six times as much per senior as it does per child, the Urban Institute has found; even counting state and local spending (which covers most education costs), the ratio exceeds 2-to-1.

While the bruising budget battles between Obama and congressional Republicans have reduced the deficit, they have hardened the generational imbalance. That's because the limits on federal spending known as the "sequester," imposed in 2013, almost entirely exempted entitlements while tightly squeezing defense and domestic discretionary programs. Those domestic programs fund most of Washington's investments in future generations (such as education) but are now operating at historically low funding levels.

Obama has repeatedly challenged this generational imbalance. His health-reform law expanded coverage for the working-age uninsured, partly by slowing the growth of Medicare spending for seniors. His proposals to fund universal access to prekindergarten and community college would both invest in the productivity of future workers. Obama's new budget directly confronts the generational inequity by proposing to repeal the sequester for both defense and domestic discretionary spending. "We need to find ways to increase investments, and that means expanding discretionary spending," says OMB Director Shaun Donovan.

Obama would pay for this spending largely through new taxes, including higher capital-gains taxes to fund the community-college program. He's right that any sustainable long-term budget plan will require more revenue. The Social Security trustees project that the number of seniors will soar past 82 million by 2040, and Washington can't maintain a decent safety net for that enormous population without increasing spending and taxes. (That's demography, not ideology.) From a generational perspective, increasing the capital-gains tax is an especially equitable way to add revenue because more than four-fifths of those gains go to Americans over 45.

But there's little chance that congressional Republicans would accept new taxes to fund new spending. So Obama might consider offering a different deal: funding greater investment in future workers by limiting spending on future seniors, especially affluent ones. Obama's budget contains more than $400 billion in 10-year entitlement savings (mostly achieved by reducing payments to physicians and requiring increased Medicare cost-sharing by better-off retirees), and reforms in his health care law have already contributed to a historic slowdown in Medicare and Medicaid spending. Reviving a proposal Obama made in 2013 to limit cost-of-living adjustments for federal programs, including Social Security, would raise another $230 billion over 10 years—more than enough to cover his pre-K and community-college proposals.

Seniors would surely squawk. But they have a self-interest in equipping more of today's young people with the skills to earn middle-class incomes and provide the tax base to support the growing retiree population. The most effective long-term budget plan would blend entitlement constraints, continued health reform, more revenue, and tough scrutiny of other spending with targeted investments in the next generation's productivity. Rebalancing federal expenditures between the old and young could provide Washington the foundation for that larger agreement.