Already exhausted by the fiscal cliff drama? Then pray for a major entitlement overhaul. Otherwise the forecasted explosion in Medicare and Medicaid will continually destabilize the government’s finances and put rival lawmakers on a perpetual loop of having to negotiate big fiscal deals with each other.
Hamilton Place Strategies, a DC-based policy advisory firm, lays out the case in a new report. Their analysis notes that the tax hikes being pushed by President Obama would last well after the 10-year timeframe being discussed, but the debilitating increase in entitlement spending really ramps up after 2023.
“Without entitlement reform, no deal will be balanced in the long-run and the U.S. will careen from one ‘Grand Bargain’ to another over a period of years,” explain HPS’ Matt McDonald and Russ Grote. “Essentially, if Republicans give in on tax rates without entitlement cuts today, they will cede a larger government without really solving fundamental problems.”
House Speaker John Boehner is seeking about $600 billion in health care savings over the next decade, some of which would reportedly come from lifting the Medicare eligibility age to 67 from 65. The White House is willing to trim the same programs by $400 billion. But Obama is demanding $1.6 trillion in tax increases on the top 2 percent of earners through higher rates and capping deductions. Republicans have proposed $800 billion in new revenues from closing loopholes and deductions.
The trouble is that Medicare expenses are demographic—with spending increasing because of the mass migration by baby boomers into retirement. Health care spending would grow from about 5 percent of all Gross Domestic Product today to 10 percent by 2037 “and would continue to increase thereafter,” the Congressional Budget Office estimated last month.
This sets up a dynamic where the GOP will have to negotiate again within this decade about deficit reduction. “This is the fundamental Republican fear and the real issue holding back a deal,” McDonald and Grote write. “Ultimately, offers that push entitlement reform into the future are simply asking Republicans to negotiate the real “grand bargain” from a default position of a higher tax base and a larger government.”
However, the report notes, this dynamic also provides an opportunity for compromise if a bargain can generate tax increases on the wealthy in the near term—pleasing Democrats—while reducing expenditures for decades to come, a comfort to Republicans.