Peter J. Nelson: As boomers grow old, America must grow up

Twelve years ago, Paul G. Peterson -- secretary of commerce under President Richard Nixon, former chairman of Lehman Brothers, cofounder of the Concord Coalition and longtime crusader for fiscal responsibility -- wrote a book that asked, "Will America grow up before it grows old?"

Peterson was speaking about whether the United States would ever confront the budget mess and intergenerational clash certain to occur when baby boomers begin retiring in larger numbers. Medicare, Medicaid and Social Security budgets were never equipped to handle this mass of retirees.

Today, as the first baby boomers enter retirement, there's little evidence America has grown up.

In fact, last month Congress again moved to duck the issue.

The Medicare Modernization Act of 2003 established a "Medicare funding warning" that Medicare trustees must clang when Medicare becomes over-reliant on general revenues. Such a warning triggers a requirement that the president must recommend ways of reducing reliance on general revenues, and Congress must then consider those recommendations on an expedited basis.

Last year the Medicare trustees did sound an alarm. President Bush dutifully made his recommendations, and Congress had until July 30 this year to act on them, but instead they changed the rules and delayed action for another year.

The truth is, the 2003 legislation creating the warning system was itself a cop-out. It implied that it's OK to wait, that Medicare's fiscal solvency will only be in real trouble when the warning gets triggered. But it's not OK. Waiting shifted more debt to younger generations and aggravated the inevitable pain we'll feel when we make the hard choices necessary to bring our fiscal future into balance.

While Democrats can be blamed for the rule change in the House, the Medicare Modernization Act represents a truly bipartisan evasion.

Frustration with this bipartisan foot-dragging is fostering some unlikely alliances. Recently, the Brookings Institution on the left and the Heritage Foundation on the right brought together an ideologically diverse group of budget policy experts to address what they call "the huge problem the candidates are not talking about."

The result was a joint report, "Taking Back Our Fiscal Future."

While this group of policy experts disagree (and often quite sharply) on specific policy solutions, they do agree on the severity of the problem. Most importantly, they agree on a starting point.

The problem: Rapid growth in entitlement spending due to retiring baby boomers, coupled with rising health care costs, will lead to unmanageable budget deficits; a need to raise taxes at the expense of economic growth, and/or the inability to meet other vital priorities, particularly investments in younger populations.

To avoid this fiscal mess, the group agreed that we should "take the three major entitlement programs off autopilot." By autopilot, it's referring to the fact that spending on entitlements takes place outside the normal budget process and automatically increases based on the number of people eligible. Consequently, entitlement budgets rarely get reviewed, and Congress and the president are never forced to balance entitlement spending with other priorities such as national defense, transportation and education.

To shut off autopilot spending, the group made the following recommendations:

•Enact sustainable long-term budgets for the big three entitlements that set limits on automatic spending growth with a review required every five years.

•Establish a trigger that forces specific actions when a five-year review predicts that spending will outpace the budget. These actions might include automatic benefit reductions, premium increases, tax increases, or specific action by Congress.

•Make the long-run costs of the three entitlements transparent within the overall budget so that entitlement spending is considered alongside other spending priorities.

Critics complain that the recommendations neglect specific issues driving up budget deficits, such as health-care costs and President Bush's tax cuts. But these are the sort of wedge issues the group wisely took pains to avoid. Instead, the group hopes to "set in motion a process that will yield an outcome that ultimately only the people and their representatives can craft."

America's fiscal train is not waiting for more baby boomers to retire before it wrecks. The White House predicts that next year's budget deficit will explode to a record $482 billion.

While modernizing America's entitlement programs will no doubt be contentious, the recommendations just outlined create a space where political leaders can show some maturity and begin the process.

Peter Nelson is a Policy Fellow with Center of the American Experiment.