With their vote this week to impose strict limits on future federal spending, House Republicans continued an argument not so much with Democrats as with demography. The real current they are seeking to reverse is not some ideological drive from President Obama to convert America into Sweden; it’s the inexorably rising cost of providing retirement security, especially health care, to an aging society.
The cut, cap, and balance bill that Republicans muscled through the House would authorize an increase in the federal debt ceiling only after Congress approved a constitutional amendment to balance the federal budget. The bill doesn’t specify the spending level at which Washington must balance the budget, but each of the major balanced-budget proposals that House Republicans have already introduced would eventually limit federal spending to an amount equal to 18 percent of the nation’s total economic output.
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Federal spending hasn’t represented that small a share of the economy since 1966, when it stood at 17.8 percent. That’s an especially revealing comparison because 1966 was the year when Medicare went into effect—the first guarantee of health coverage for the nation’s seniors. The program didn’t even begin until July 1; Washington spent only about $100 million on it that first fiscal year. Medicaid, which provides care for both the poor and the elderly, was also just getting started; it cost the federal government only about $800 million in fiscal 1966.
Since then, those two programs, along with Social Security, have provided much of the upward pressure on spending. From 1948 through 1966, federal spending averaged just over 17 percent of the economy—about the level that House Republicans are hoping to restore. Since 1967, federal spending on average has grown to just below 21 percent of the economy.
The difference between the two eras is entirely explained by the growth in federal payments to individuals—preponderantly, entitlements for the elderly. In the first period, essentially before Medicare and Medicaid, Washington spent on average an amount equal to 4.2 percent of the economy each year on payments to individuals. Since 1967, the average annual cost of payments to individuals has more than doubled, to 10.5 percent of the economy. If you do the math, that means that as a share of the economy, Washington actually has spent slightly less on everything else—defense, national parks, education, environmental protection—over the past 40 years than it did in the previous 20.
Within the overall explosion in federal payments to individuals, the key driver has been health care—again, predominantly for the elderly. In 1965, federal health care spending equaled less than 1 percent of the economy. Today, the figure stands at 6.3 percent. That’s not because of Obama’s health care legislation, which doesn’t generate significant spending until 2014 and is projected to largely pay for itself by restraining Medicare’s growth; it’s because Medicare and Medicaid now cost nearly $800 billion annually.
Two factors above all are swelling those programs. One is the unbroken rise in per capita health care spending as medical technology advances. The other is the growing elderly population. When Medicare began in 1966, it served about 19 million seniors. Today, the program serves nearly 48 million. Its trustees project that by 2035 that number will approach 86 million.
Against that overwhelming demographic pressure, mandating that federal spending return to its 1966 level is like ordering the tide to reverse its course. Although many Republicans want to cap federal spending at 18 percent of the economy, the nonpartisan Congressional Budget Office projects that Social Security, Medicare, and Medicaid alone will consume about 15 percent of the nation’s total economic output by 2035. And under other scenarios that CBO has explored, even that figure might be optimistic.
That prospect points toward two large conclusions. One is that it’s unrealistic to limit federal spending to levels last seen when the elderly represented only about half as large a share of the population as they will in the decades ahead. Given the demographic demands, future federal spending will almost certainly require more than 21 percent of the economy—although likely less than the swollen 25 percent level reached after 2009’s stimulus program. A corollary is that sooner or later, the demands of providing for an aging society without gutting everything else that government does will require Washington to raise more revenue.
The second large conclusion bookends the first: It would be irresponsible to surrender to demography as fiscal destiny. Unless Washington controls entitlement spending, especially by slowing the overall rise in health care costs, these programs will bury all other public needs and impose unacceptable tax burdens on a working population shrinking in relative size; by 2035 there will be only half as many working-age Americans per senior as there were in 1966.
Too many Democrats resist the need to restrain entitlements, and even more Republicans refuse to admit the need for more revenue. Yet only by moving on both fronts—beginning in the debt-ceiling standoff still convulsing the capital—can the nation go gray without falling dangerously into the red.
This article appears in the July 23, 2011 edition of National Journal Magazine.
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