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.