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The wrong side of history

Adam Newman | Wednesday, March 28, 2012

“A nation’s greatness is measured by how it treats its weakest members”. This quote by Mohandas Gandhi reflects a belief held by most Americans that markets cannot always effectively allocate resources towards those who hold little market power, such as the sick, elderly and poor. Beginning with the Progressive Era in the early 1900s, American policy became more directed towards both protecting and assisting these Americans. The most significant steps came with the creation of Social Security (old age retirement insurance) in 1935, Medicare (health insurance for the elderly) in 1965 and Medicaid (health insurance for the poor and long term care insurance for the elderly) in 1965.

At the time of their creation, these programs were extremely controversial. But due to their effectiveness at helping the disadvantaged, they have become wildly popular. This is why those (both Democrats and Republicans) who created Social Security, Medicare and Medicaid were on the “right side of history.”

However, these programs will become dangerously costly over coming decades due to two trends. The first trend is the aging of the population. After WWII, there was a major increase in population growth where 80 million Americans were born between 1946 and 1964. These Americans are known as the “baby boom” generation. The first “boomers” turned 65 (hence becoming eligible for Social Security and Medicare) in 2011, and 10,000 will turn 65 every day for the next two decades.

The second trend is the rising cost of health care. Over the past three decades, health care has grown roughly three percent faster than gross domestic product and will continue to grow at a slightly slower, but still unsustainable pace over coming decades. This rate compounded over many decades will dramatically raise how much every American spends on health care.

The combination of these two trends will cause spending on these programs to skyrocket. While projections are difficult to make because of different assumptions and uncertainty, the numbers are all bleak. The non-partisan Congressional Budget Office (CBO) recently projected that by 2021, Social Security, Medicare, Medicaid and interest on the debt will take up nearly all tax revenue. By approximately 2050, Social Security, Medicare and Medicaid will take up all tax revenue, and by 2080, Medicare and Medicaid will take up all tax revenue. If these numbers do not scare you, I do not know what will.

While there may be nothing more important to the fiscal future of the United States than to reform these programs, there is nothing more difficult. The dependence that older Americans have on these programs, combined with their high participatory rates in elections and the unfortunate reality that older people can be easily fooled and scared by politicians have made reforming these programs the “third rail of American politics.” (Electricity runs through the third rail on a train track. If you touch it, you get electrocuted.) The irony is that most reform proposals only affect those who are 55 or younger and preserve current benefits for anyone older. Even still, nearly every time that either party proposes reform, the opposing side, instead of proposing an alternative solution, works to vilify the proposal to gain the senior vote.

As these programs, deemed unreformable, grow and take up a larger and larger portion of the federal budget, lawmakers will most likely cut the “low-hanging fruit” in the budget-spending on critical investments like education, innovation, infrastructure and scientific research. Even though investment spending has fueled American prosperity since its conception, its short-term payoff is small, making it very easy to cut relative to the difficulty of reforming Social Security, Medicare and Medicaid. To make cuts in these areas would be misguided as the world becomes more globalized, technologically advanced and competitive.

As I said earlier, those who created Social Security, Medicare and Medicaid were on the right side of history for doing so. But if the status quo continues, and these programs go unreformed, America will accumulate fiscally unsustainable amounts of debt as critical investments are cut. As a result, America will begin the slow but steady decline over the next half-century towards a fiscal future that would make even the Greeks cringe. Then, when today’s old are gone and today’s young are old, future generations will reopen the history books and curse those who refused to reform Social Security, Medicare and Medicaid to the wrong side of history.

Adam Newman is a junior finance major. He can be reached at [email protected]

The views expressed in this column are those of the author and not necessarily those of The Observer.