Five Steps for Taming the Federal Spending Beast

The runaway federal spending that has accompanied the coronavirus pandemic will force a reckoning in the “mandatory” portion of the U.S. government’s budget after the pandemic has passed.

That’s the assessment of AEI resident fellow James Capretta, who indicates that the reckoning will mean big changes for mandatory entitlement programs whose spending has been running on autopilot for years, such as Social Security, Medicare, and Medicaid, which together represent the majority of future federal spending.

Spending, Capretta argues, will become even more difficult to sustain because of the mountain of debt the U.S. government has been accumulating to fund economic relief from the coronavirus pandemic and related government policies responses.

… forecasts of rising debt over the long run can effect economic performance even before the problem is on the doorstep. The U.S. is still viewed internationally as having the strongest economy, and the dollar is the world’s reserve currency. But perceptions can change, and will, if the U.S. remains on course to run up debt in excess of 200 percent of GDP, which is now a real possibility. Countries get into trouble when they struggle to extract sufficient revenue from their citizens to cover current obligations and service accumulated debt. The U.S. is not at that point, but could be soon. CBO estimates debt at 150 percent of GDP would necessitate net interest payments equal to 7.2 percent of GDP in 2050. These payments would come at the expense of the immediate needs of voters, and would benefit many foreign holders of Treasury debt instruments.

Capretta lists five steps that the U.S. government could take to close its wide budget gap, steps he believes could be phased in gently to put entitlement spending on a more sustainable path without greatly disrupting the lives of Americans who depend on these programs.

  1. Automatically index the age for Americans to receive full Social Security retirement benefits, to stabilize the ratio of retirees to workers.
  2. Progressively adjust Social Security benefits, by increasing the amount Americans with the lowest lifetime incomes receive and reducing the amount Americans with the highest lifetime incomes receive.
  3. Establish personal retirement accounts for Social Security beneficiaries, to improve the solvency of the program by partially offsetting the amount of money that would otherwise have to be paid to retirees from taxes paid by working Americans.
  4. Index the amount of Medicare premium support to the average cost of all competitive Medicare plan options, which the program’s beneficiaries can then use to pay toward the full cost of the coverage they choose each year.
  5. Enroll Americans who are eligible for both the Medicare and Medicaid programs into a mandatory managed care program.

The last item is especially attractive because a disproportionate share of Americans killed by COVID-19 contracted the coronavirus in nursing homes, which house millions of Americans who qualify for both Medicare and Medicaid. Capretta argues that an effective managed care program would minimize the need for the expensive nursing home stays.

If that reform had been in place before 2020, these programs would be more fiscally sustainable and dually eligible Medicaid and Medicare beneficiaries would be getting better care. Moreover, fewer Americans would have been at put at risk of dying from COVID-19 because they wouldn’t have required longer stays in nursing homes.

Done right, reforms such as Capretta’s can both save lives and repair the U.S. government’s deteriorating fiscal situation.

Craig Eyermann is a Research Fellow at the Independent Institute.
Beacon Posts by Craig Eyermann | Full Biography and Publications
  • Catalyst
  • Beyond Homeless