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Budget guru sees ‘super-subprime crisis’

A look at the problems surrounding the nation's entitlement programs — a funding issue so dire, one budget guru says it could dwarf the subprime crisis.
Image: A volunteer counsels a medicare recipient about her plan
Caren-Marie Bowman, left, helped Pauline Chase, 78, sign up for her Medicare Part D prescription plan in Concord, N.H. in 2006. The plan added hundreds of billions of dollars to future tax burdens.Jim Cole / AP file
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This election cycle, is presenting a weekly series, Briefing Book: Issues '08, assessing issues and controversies that the next president must confront.

This week, we look at the massive burden which future taxpayers must carry to redeem the promises Congress made in creating the Medicare and Social Security entitlements.

Why it’s a problemThe former head of the government’s in-house watchdog agency warns of the seriousness of the entitlement issue, saying it's a problem that could dwarf the nation's subprime emergency.

“I think we have the makings of a super-subprime crisis dealing with the federal government’s finances, and we need to defuse it,” said David Walker, former chief of the Government Accountability Office.

Government accountants estimate that, in the long-run, imbalance between federal spending promises and expected revenues is about $54 trillion in today’s dollars.

This is largely the result of two programs geared toward senior citizens, Medicare and Social Security.

Thanks to escalating medical costs and a large population of retiring baby boomers, a shortfall equivalent to roughly $470,000 per American household has been created.

Walker, a former trustee of Social Security and Medicare who now leads a foundation devoted to raising awareness of these issues, says we're just beginning feel the effects: “This is the tip of the iceberg.”

While neither Barack Obama nor John McCain have made this issue a central theme of their campaigns, the candidates, along with their advisers, acknowledge its severity.

McCain “recognizes that the U.S. government will not achieve and maintain fiscal balance until we address the long-run spending in these two programs,” his chief economic adviser, Doug Holtz-Eakin told

“The fiscal situation is serious. In the short run, what we need to do is stop digging the hole any deeper,” said Jason Furman, Obama’s economic policy director.

To help shore up Social Security, Obama has proposed a payroll tax increase on people making more than $250,000 per year. The tax currently applies only to the first $102,000 of income.

Last October, Obama described this tax increase as a way to make sure that "the wealthy are paying more of their fair share."

Furman said Obama hasn’t taken any potential fixes off the table, but that he is opposed to program changes that would lower benefits, including proposals to raise the retirement age.

He is also opposed to having private accounts supplant Social Security.

On Medicare, Furman said Obama believes that reforms can’t be done effectively apart from a larger health care overhaul. “So what you need to do is put in place a set of ideas that would slow the growth of health spending economy-wide,” he said.

According to Furman, Obama would encourage health providers to use electronic medical records, rather than paper, to help reduce administrative costs.

He would also create an executive branch office to conduct comparative effectiveness research, helping to facilitate a change in the way medicine is practiced.

Holtz-Eakin said McCain, who currently receives Social Security benefits, is unlikely to offer a specific proposal to change the program during the campaign.  

“It is a very specific proposal that would polarize the debate,” he said of the payroll tax.

McCain, who earlier this year said the way Social Security is funded is a “disgrace,” does favor one specific change: He backs the creation of private accounts, which he would like to see added on top of the current system.

As for Medicare, Holtz-Eakin said McCain would emphasize changes within the program to produce quality care at a lower cost.

“Medicare reforms can have a dramatic impact on the practice of medicine,” he said. “You can use Medicare as a tremendous lever.”

McCain would use Medicare to get more doctors to focus on disease prevention and to better coordinate efforts among different medical specialists, Holtz-Eakin said.

McCain also supports using Medicare to negotiate large-scale savings on prescription drugs.

Unanswered questionsWith the U.S. economy sputtering, will Americans have an appetite for changes to these massive entitlement programs? Are they open to having their taxes raised or benefits cut during a time of economic hardship?

“We can turn this around with leadership,” said Walker. “But we’re also going to have to recognize that the regular order, the regular way of doing business in Washington is broken.”

Will anything short of a major crisis force Congress and the president to act? Is Washington even capable of dealing with such long-run problems?

President Bush failed in spectacular fashion when he tried to overhaul Social Security in 2005, with McCain acting as one of his plan's most prominent backers.

“Leadership is only going to come from somebody using the bully pulpit to create a mandate, so this is the opportunity for leadership,” said Maya MacGuineas, director of fiscal policy at the New America Foundation and an adviser to McCain’s 2000 presidential campaign.

“Otherwise, a crisis is what it will take. And that’s a real problem, because Wall Street is short-term focused,” she said. “The financial markets will make us deal with it, but it will be too late when they do.”

One of the great unknowns is how fast health care costs will grow in the coming decades.

Experts say rising health care costs are driving the long-run fiscal gap even more than demographics. Will these costs keep rising at double the rate of inflation or will they settle down?

“If there is one thing that could bankrupt us, it is health care costs,” Walker said. “We are the only country in the world that writes a blank check for health care, and that is mindless and it must end.”

Evolution and shifts in positionMcCain’s position on tax increases to fund Social Security has been variable.

At times, he has been critical of Obama’s payroll tax plan even as he has said that everything is on the table — a stance which would seem to include tax increases.

But after McCain reiterated this position on ABC News, conservative activists were critical, and he backed off slightly.

“Any negotiation I might have, when I go in, my position will be that I am opposed to raising taxes. But we have to work together to save Social Security,” he later said.

This appears to mean that McCain won’t advocate for tax increases, but if they are part of a larger reform package, he might acquiesce.

“He’s very clear about the desire to keep everything on the table, so you can get an effective reform,” said Holtz-Eakin.

According to the Wall Street Journal, in 2000, McCain ran on a platform of diverting a portion of payroll taxes into private accounts — a plan that would take money out of the current system.

But now, McCain’s campaign maintains that he supports private accounts only as an add-on to the current system rather than a replacement.

Like McCain, Obama has been at times a vocal advocate of the “everything is on the table” approach to Social Security reform.

“Everything should be on the table. I think we should approach it the same way Tip O'Neill and Ronald Reagan did back in 1983,” he told George Stephanopoulos of ABC News in May 2007.

“They came together," said Obama. "I don't want to lay out my preferences beforehand, but what I know is that Social Security is solvable.”

Does this include raising the retirement age?

According to the Washington Post, Obama later ran an ad saying that protecting Social Security benefits is one of his core reform principles.

“He wants to protect middle-class families,” Furman said of Obama’s approach. “He thinks you can’t do that if you’re raising the retirement age.”

Last year, the Senate considered an amendment that would require wealthy Medicare beneficiaries to pay a greater share of their prescription drug costs.

Obama voted against this amendment. McCain didn’t vote, but has said that he supports the idea of having wealthy beneficiaries pay more for their benefits. His campaign says that would save the government billions of dollars.

McCain has never been a big supporter of the Medicare prescription drug program, which was created in 2003 despite his opposition.

Fearing the program would be too costly, he was one of 21 senators to vote “no” on the Medicare prescription drug bill.

Obama was not in the Senate when the drug entitlement was created, but he has regularly voiced support for it, even as he’s backed some cost-saving measures, like giving the government the authority to use Medicare to negotiate drug discounts. In fact, he supported an amendment McCain co-sponsored to give the government this authority.

As far as Social Security is concerned, the candidates have not faced too many votes in recent years.

But twice, McCain and Obama voted on opposite sides of legislation repealing a 1993 tax increase on Social Security benefits, once in 2006 and again earlier this year. McCain voted to repeal the tax increase, while Obama voted to keep it.

Surprises for the new presidentIf the economy keeps stumbling, neither candidate is likely to have much luck raising taxes or cutting benefits. But that doesn’t mean the shortfalls in these programs won’t affect a McCain or an Obama presidency.

Starting this year, the oldest members of the baby boom generation are eligible for Social Security, according to the GAO. In three years, they will be eligible for Medicare. As more boomers collect benefits, the budget will be pinched, with bigger and bigger percentages of total outlays going to support the programs for retirees.

Analysts say that will put the burden squarely on the youngest Americans, who may have to foot the bill someday through higher taxes, reduced benefits or slower economic growth.

“We’ve got massive taxation without representation going on right now,” Walker said. “In many cases, the people who are going to have to pay the bills are too young to vote or aren’t born yet. That is not only fiscally irresponsible it is morally reprehensible.”