My first approach was to assume that people receiving entitlements should pay for them, thus benefits should be reduced and/or their costs increased so that they are self-supporting. The options I chose were: Gradually raise the Social Security and Medicare eligibility age to 70; index Social Security increases to the CPI instead of wage increases and revise the CPI; reduce Social Security benefits for nonworking spouses from 50% to 33%; charge a $40 per month premium for Medicare Part A, index Part B premiums to the rising cost of health care and implement a $300 deductible; require a 20% co-payment for home health care and lab fees; tax the value of Medicare premiums "paid by the government" as income; tax employer-paid health insurance premiums above $440 per month for families, $210 per month for individuals, as income; increase the Medicare payroll tax from 2.9% to 3.9% in 2016; allow the Feds to price-fix acute-care payments to providers; increase the retirement age for Civil Service employees to 70 and reduce retirement benefits for Congress and career military; and make an (unspecified) 25% cut in other entitlements, such as welfare, by the year 2000.
Chart 1. "Reduce Benefits to the Max" approach.
The results are shown in Chart 1, and as you can see, the budget deficit does almost disappear (to 0.9% of Gross Domestic Product) and, in real life, would probably run a surplus because the economic drag from running persistent deficits would be removed. I leave it to you to decide if, politically, this is do-able, since virtually no special-interest group would be left untouched. (Don't write to me.... write to your Congresspersons!)
After bowing to political reality I decided to see what would happen if the present benefits schedules were left untouched, but taxes/premiums (or whatever) were raised to pay for them, and this result is shown in Chart 2.
Chart 2. "Pay As You Go" approach.
For this scenario I made the following choices: tax the subsidized part of health-care premiums, and all employer-paid health-care premiums, as income; eliminate the maximum wage cap on the "employer's share" of Social Security taxes; tax Social Security payments like private pension plans; raise the Medicare payroll tax (currently 2.9%) to 5.9% in 2000, 7.9% in 2008, 11.9% in 2010 and 14.9% in 2024; and raise the Social Security payroll tax (currently 12.4%) to 13.4% in 2016 and 15.4% in 2024.
As you can see from the chart, this approach does bring the budget into balance; but by the year 2024, the combined Social Security and Medicare payroll tax (half "employer-paid") would be 30.3%, almost double today's rate. Marginal tax rates would be as high as 60%.... shades of the 1970s! Also, the government's share of GDP would rise to 27% by 2030.... and since the government's share of GDP has, historically, been just under 20% of GDP for almost 50 years, as a practical matter this could not be done; the economy would just roll over and die instead.
For my third attack on the deficit.... although I knew in advance more-or-less what the outcome would be.... I tried the "Donkey Approach" so much in favor by those who try to get ahead politically by whipping up class envy. For this, I made the following choices: Reduce Medicare benefits for individuals with incomes of more than $100,000 per year ($110,000 for families), and eliminate them entirely above $120,000 ($130,000 for families); reduce unemployment compensation and veterans' payments on a similar schedule; tax capital gains at death; reduced income tax itemized deductions by 10% (currently 3%) for individuals with incomes above $54,000 per year ($108,000 for families); eliminate the maximum wage cap on the "employer's share" of Social Security payroll taxes; and reduce Social Security benefits for higher-income retirees.
The results are shown in Chart 3, and as you can see, even using the government's own computer program, this approach fails miserably, simply because "the rich" are not numerous enough to make slashing their benefits and raising their taxes count for much. (But it might really put a damper on economic growth!)
Chart 3. "Soak The Rich" (Donkey) approach.
The real money lies with the middle class, so for my fourth and final "stealth" approach, I took the attitude that the working middle class should be willing to pay for current retirees' benefits in exchange for being similarly taken care of when those currently working in turn retire.... the social contract that currently exists.
The options I chose were: Tax the "government-paid" Medicare premiums, and all employer-paid health-insurance premiums, as income; institute a $300 annual deductible for Medicare Part B, and index future premiums to the rising cost of health care; allow the Feds to price-fix government-paid medical expenses; revise the CPI and index Social Security increases to it; means-test unemployment and veterans' payments; implement certain "structural reforms" to the Civil Service retirement system, and reduce Congressional benefits; tax 90% of employer-paid fringetax Social Security payments like private pensions, and force state and local government workers into the Social Security system; and finally (the big money-raiser!) eliminate income-tax deductions for home mortgage interest, state and local taxes, and charitable contributions.
Chart 4. "Soak The Middle Class (And Rich)" approach.
This approach would presumably work by greatly increasing the flow of money into the government's coffers without raising marginal tax rates; note that the government's share of GDP would rise from the current 19.5% to about 24% by 2030. But, personally, I don't think the electorate is currently in the mood to ship another $2K or so per family per year into the black hole we call Washington, no matter how worthy the cause.
Kindly compare the many difficult choices I have outlined with the noise currently emanating from the Republican-controlled Congress. Beating up on welfare mothers and deadbeat dads may be good for the soul, but it is just small potatoes; correcting welfare abuses simply is not going to solve our entitlements problem. The current congressional approach is to reduce the rest of government and/or maybe shuffle around a bit who gets the money; the welfare benefits of the middle class remain untouched.
That brick wall of too-much-debt which we're due to hit somewhere around the year 2005 still looms sturdy and large. If we are to avoid crashing into it, my guess is that the approach eventually taken will most closely resemble Chart 1.... benefits will be sharply curtailed.