Cancerous budget: Congress's failure to confront the pending retirement of Baby Boomers may lead to catastrophe.

Congress's failure to confront the pending retirement of the Baby-Boomers may lead to catastrophe.

FROM THE bragging about the budget deal by its top players, it was quite an achievement. "We have put America's fiscal house in order again," crowed President Clinton on the White House lawn on July 29. Senate Majority Leader Trent Lott (Miss.) was even more extravagant. "Today we celebrate the beginning of a new era of freedom," he proclaimed. For John Kasich, it was "a dream come true."

Prima facie, the plan does look impressive. In 1998 - 2002, it cuts taxes by a net $95 billion -- the first tax cut since 1981 -- and cuts projected spending by about $263 billion, including $115 billion from Medicare and $10 billion from Medicaid.

Closer scrutiny, however, discloses spending-side sins, of commission and omission, which make it impossible to reconcile the budget deal with prudence or even sanity.

First, discretionary spending cuts must provide about half the planned savings -- but Congress has made no hard choices specifying where the knife will fall and how deeply. "That's the silent victim," said Robert Reischauer, a Brookings Institution senior fellow and former Congressional Budget Office director. "No one talked about where those savings are going to come from." Moreover, most of them are postponed until 2001 and 2002.

Furthermore, the deal significantly undoes last year's welfare savings. Legal immigrants who lost eligibility for disability benefits get them back, costing $11 billion over 1998 - 2002. Congress also voted $1.5 billion to reverse food-stamp cuts, and $3 billion to help welfare recipients get jobs.

However, the budget deal's worst flaw is its willful refusal to face the Baby Boomers' retirement, which will create a genuinely catastrophic fiscal crisis.

The generation that was born between 1946 and 1964 and will start retiring about 2010 is abnormally huge (hence "Baby Boom"), and will be supported by a slower-growing taxpayer population. Under Social Security's intermediate actuarial assumptions (intermediate, that is, between optimistic and pessimistic), from 1995 to 2030, when the last Boomers retire, the population aged 65 and over will double, from 34.2 million to 68.4 million. But the population aged 20 to 64, whose taxes will pay their Social Security and Medicare benefits, will grow by just 20.6 per cent -- from 159.6 million to 192.4 million.

This spells disaster. Today, 3.3 taxpayers support every beneficiary of Old-Age Survivors and Disability Insurance (OASDI); under intermediate assumptions this ratio falls to 3.0 in 2010 and just 2.0 in 2030. Likewise, in 1996 Medicare's Hospital Insurance (HI) had 3.9 taxpayers supporting each beneficiary. In 2030, there will be just 2.3 taxpayers per beneficiary. The conclusion is inescapable: current Medicare and Social Security tax rates cannot possibly generate enough revenue to pay the Boomers' benefits.

With their outlays outstripping their resources, OASDI and HI will have to liquidate their "trust funds" of government debt. HI is already doing so -- it ran deficits of $4.2 billion in fiscal 1996 and an estimated $9.9 billion in 1997 -- and, under intermediate assumptions, it will go bankrupt in 2001. OASDI's trust fund is projected under intermediate assumptions to run out in 2029. Under high-cost assumptions, which Social Security's former chief actuary A. Haeworth Robertson argues are more realistic, OASDI will go bankrupt in 2018 -- just 21 years from now.

The trust-fund deficits will quickly become catastrophic (see table). Without timely, radical reform of Social Security and Medicare, all our options will be bad. Abrupt, large increases in Social Security and Medicare taxes to erase these deficits and keep paying current-law benefits would crush millions of taxpayers and the economy as a whole. Abrupt, deep benefit slashes would devastate retirees. Covering these huge deficits by borrowing would add similar amounts to the budget deficit. If our creditors refused to lend such sums, as they well might, the only other recourse would be hyperinflation.

HOW much time do we have to avert these outcomes? In The Big Lie, his recent popular-level criticism of Social Security, former chief actuary Robertson persuasively contends that "Frankly, it is already too late to make a smooth transition to a new system (we should have acted in the early 1980s). A very bumpy transition can be made in the late 1990s" -- that is, now. After 2000, however, "we will be trapped." Social Security's unsustainability will be clear, but "it will be too late to implement a revised program without causing a different form of social and economic turmoil that is equally disturbing."

In the face of these warnings, Congress's performance has been criminally feckless. At first, it looked as if Congress would at least nibble the Medicare bullet. The Senate approved increasing monthly Medicare B (Supplemental Medical Insurance, SMI) premiums for higher-income beneficiaries, raising the benefit-eligibility age from 65 to 67, and charging (gasp!) five-dollar fees for home-health-care visits. But in the end Congress flinched from even these modest measures, opting to get most of its projected savings by squeezing payments to doctors, hospitals, and other providers. It also resorted to a classic dodge of foundering concerns: shifting costs from a sick unit to a healthy one. Home-health-care costs were switched from Medicare A (HI) to Medicare B (SMI), which is financed from general revenues and patient premiums. This supposedly postpones HI's trust-fund insolvency to 2007.

Meanwhile, President Clinton, who is paid to provide leadership, furnished none whatsoever. Indeed, his demagoguery on the Republicans' 1995 Medicare reform attempt doubtless influenced Congress to avoid bold measures.

This year's vaunted budget deal furnished mere palliatives. True, squeezing providers will slice HI's projected deficit (on intermediate assumptions) for 1998 - 2002 from $179.9 billion to $64.9 billion. But afterward, even at cheaper rates, the exploding beneficiary population will still swamp Medicare. As for the cost-shifting, in calendar 1996 home-health-care costs were $17.5 billion, just 13.5 per cent of HI expenditures, up only slightly from $15.5 billion (13.3 per cent) in 1995. Hence this gambit gives only minor relief. And HI deficits are projected to explode even before the Boomers retire: $69.6 billion in fiscal 2003, $97.3 billion in 2005, and $114.5 billion in 2006.

In any event, the deal's Medicare expansions will offset its savings. The budget bill creates, of all things, seven new benefits, covering things such as mammography; Pap smears; tests for colon cancer, prostate cancer, and osteoporosis; and education in self-testing for diabetics. The bill provides $4 billion for these benefits. Medicare payments to health-maintenance organizations serving rural areas get increased, too. When the Boomers retire, these expansions will raise Medicare spending by tens of billions of dollars annually -- opening another vein on an exsanguinating patient.

The deal's only acknowledgment of oncoming disaster is the appointment of a bipartisan commission to study Medicare and issue a report by January 1999 -- 15 months away. Congress thus has an excuse for inaction this year and next, so that it can avoid more Medicare demagoguery from Clinton in the 1998 election. And neither party will care to enter the 2000 presidential election with its name on draconian Medicare reforms. Congress's escape into a commission, then, most probably means no action until 2001 -- which, as Robertson argues, would be too late.

Note that the Social Security Advisory Council reported this past January, three years after its formation, and nothing has yet been done about its proposals. The budget deal ignored Social Security completely.

In short, the budget deal threw away what was probably our last chance to squeeze through a rapidly closing window of opportunity.

Under these circumstances, the last thing America needs is another entitlement, but the deal created one, for children without health insurance. States will receive $24 billion in 1998 - 2002 to provide health insurance for 3.4 million uninsured children in any of several ways: buy private insurance for children; expand Medicaid; strengthen other programs; or locate uninsured children and buy services directly from doctors and other providers.

If this sounds innocuous, recall that today's budget-busting Medicare and Medicaid started as a cloud no bigger than a man's hand. From an initial $2.5 billion in 1967, Medicare outlays had soared to $171.3 billion by 1996. In 1965, Medicaid spent just $300 million; in 1996, $92 billion.

Moreover, just as Medicaid created incentives for well-off Americans to artificially impoverish themselves by asset transfers in order to qualify for benefits, so Kiddiecare creates incentives for lower-and middle-income parents not to insure their children, and for employers not to insure employees' children.

And the Administration's agenda in this area makes it almost certain that this $24 billion for Kiddiecare is only the beginning. Unable to socialize medicine in one swoop, the Clintons are now socializing it by salami-slicing. Writing in the New York Times on August 5, Mrs. Clinton made that clear -- and signaled that we can expect intense Administration pressure to maximize the beneficiary population:

As the largest expansion in children's health coverage since Medicaid's creation 30 years ago, the bipartisan legislation could move the United States closer to shedding its status as the only Western industrialized nation that does not provide basic health benefits to all children. . . .

. . . While $24 billion . . . should be a significant incentive, dollars alone may not induce participation across the board. That's why our most urgent task is to educate citizens, especially parents, about what is at stake, and to encourage state officials to join the program and assure adequate benefits for all children. . . .

While this law will not fully achieve the universal coverage that I believe is in the nation's best interest, Americans should be proud that our Government has made another down payment on the President's goal of providing health insurance for all citizens. [Italics added.]

The effect on federal health-care outlays is grimly predictable. Putting all ten million uninsured children on Kiddiecare, as the Clintons want, would probably roughly triple the five-year cost, to about $72 billion. Fold in the additional millions of uninsured infants and children whom we can expect among us in the next two decades if illegitimacy and divorce and Third World immigration keep soaring, and we have a recipe for burdens that we cannot conceivably bear.

The budget-balancing pact is a disaster. It cravenly backloads its vague, bogus spending cuts into the next century. Its expansion of Medicare as the program founders and its creation of a new entitlement will make it almost impossible to avoid being drowned by the oncoming tsunami of red ink. Some dream.