Don't worry about the scary-sounding federal budget proposed by House Republicans ever becoming law. Democrats who control the Senate—and the White House—will never approve it. But pay attention to the details anyway, because sooner or later, many of the deep cuts and other hardships envisioned in the plan are likely to happen.
[See how to survive tax hikes and spending cuts.]
The audacious Republican proposal, authored by Rep. Paul Ryan of Wisconsin, is the first serious effort to tackle the mushrooming cost of government-funded healthcare for retirees and the needy. And Ryan is aiming high. He wants to cut $6.2 trillion in government spending over the next decade, and balance the federal budget by 2015. To reach those extremely aggressive goals, Ryan would phase out the current pay-for-everything Medicare program for Americans who turn 65 beginning in 2022, replacing it with government subsidies that would help seniors pay for insurance they buy on the open market. He's instituted deep Medicaid reforms that would mean fewer healthcare benefits for the poor. There would also be unspecified changes to Social Security and cuts in most other categories of government spending. The sugar that's supposed to make this bitter medicine go down is a simplified tax code, along with tax cuts for individuals and corporations.
There are plenty of holes in the plan. For one thing, it seems like a giveaway to wealthy Americans and big corporations, since they'd benefit disproportionately from tax cuts while bearing little or no burden for cuts in middle-class benefits. A credible plan would have to spread the pain much more broadly. It's also not clear how the elderly poor would get healthcare, since they wouldn't be able to afford private insurance, even with subsidies. And Republican claims that deep cuts in government spending—in the midst of a halting economic recovery—would promptly create one million new jobs and raise incomes seem dubious at best.
But Ryan has done something virtually no other politician has dared: draw a bullseye on sacred cows that are loved by voters but also bankrupting the nation. It could still be years before Congress agrees on ways to get Medicare, Medicaid, and other spending under control, but the Ryan plan has at least cut through the usual hokum about puny cuts in discretionary spending and other small-caliber moves that conveniently exempt the majority of voters. Instead, Ryan has highlighted big things that will affect Americans the most. Here are five big changes that seem inevitable, whether through some variation of the Ryan plan or another set of proposals:
Seniors will have to bear some of the cost of their healthcare. There are two basic problems with Medicare, which accounts for about 13 percent of all government spending. The first is that it largely absolves patients from worrying about the cost of their care, since government payments go directly to doctors and hospitals. So patients have no reason to weigh costs against benefits or do much else to shop for the best deal, which is pushing government healthcare spending to unsustainably high levels. The second problem is that the aging of the baby boomers will flood the Medicare program with beneficiaries who can't be completely supported by younger taxpayers.
[See how to tell when America's debt crisis gets serious.]
There are a lot of proposals for lowering overall Medicare costs, and most of them call for seniors to spend at least some of their own money on care, so they have a strong incentive to be selective about what they pay for and lower their own costs, along with the government's. This sounds draconian, but it doesn't need to be. Medicare is extremely popular, and politicians aren't about to gut it or eliminate key provisions like catastrophic coverage. But it's inevitable that patients will become more responsible for some expenses. Smart patients should get in the habit of looking for ways to lower the cost of nonessential things, negotiating with providers, and learning how to navigate insurance-company bureaucracies to get the maximum benefit for the lowest cost. Yeah, it's a pain. But it's also going to become a way of life for seniors, if Medicare is to continue in any form.
Less aid for the needy. Democrats are already howling about proposed cutbacks in Medicaid and other programs for the poor, but Ryan's plan underscores an uncomfortable fact about periods of austerity: The needy tend to suffer the most because they're most dependent on government. That doesn't mean the poor need to go without food aid, healthcare, or other kinds of assistance. America is still a rich nation, able to provide a significant safety net for those who need it. But thresholds for eligibility will get tighter, because the alternative is higher taxes on middle-class voters who already feel financially stressed and won't tolerate a bigger bite out of their take-home pay. That makes it more important than ever to run programs efficiently and make sure aid goes to only the most needy. But it's probably inevitable that some worthy recipients will feel neglected.
[See how government spending skyrocketed.]
More taxpayers. When Ryan and others talk about "enlarging the tax base," what they mean is forcing people who pay no federal income tax to cough up a little something. That can add up. About 45 percent of all households pay no federal income tax, a proportion that many tax experts feel is too high. About half of those evaders have earnings that fall below taxable minimums, according to the Tax Policy Center. But the other half tend to be middle- and working-class people claiming deductions for child care, retirement savings, college loans, and other things that help lower their tax burden to zero. Simplifying the tax code, which Ryan and many others have called for, could allow for lower overall tax rates—but only if there are fewer deductions and more people paying taxes.
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Better retirement planning. Ryan's plan doesn't specify what he would change about Social Security, which is easier to fix than Medicare or Medicaid. But other proposals have called for slightly faster increases in the government retirement age or small hikes in the Social Security withholding tax, to shore up funding for this popular program. But that still leaves millions of Americans unprepared for retirement. A variety of surveys show that nearly half of baby boomers expect their living standards to fall once they stop working, because they haven't saved enough for retirement—and Social Security won't be enough to cover the gap.
Americans approaching retirement age seem to have been counting on the government or some other magical force to intervene and help pad their retirement. But it would be smarter to count on the opposite: expected benefits that don't materialize. That's already happening, as some public workers lose pension benefits that municipalities can't afford, and millions of others grapple with falling home values and depleted investment accounts. Life is going to get more expensive for seniors, as they pay a bigger share of their own living costs. Saving more, earlier in life, is the solution.
[See why baby boomers are bummed out.]
Middle-class sacrifice. Ryan might have felt his plan was enough of a downer, without having to point out one other inconvenient likelihood: Government subsidies for the middle class are likely to come down too, which is the equivalent of a tax hike. The biggest middle-class subsidy is the mortgage-interest tax deduction for home owners, which costs the government about $120 billion a year and also happens to distort demand for housing. The government won't eliminate this commonly claimed deduction entirely, since that would cause another deep shock to the housing market—and to millions of families' household budgets. But it's quite plausible that there could be phased-in caps on the deduction, which would affect people who own expensive or second homes. The more desperate the government gets, the further down it could push the caps.
That's just one example of entitlements we take for granted, but shouldn't. Ryan also wants to scale back discretionary spending, which sounds like a good idea in general, but that would mean less money for parks, urban development, Amtrak, research centers, public radio and TV, arts and humanities programs, and a lot of other things that make a meaningful contribution to Americans' quality of life. As Ryan has shown, even the most popular programs are vulnerable when the people want smaller government. Which you do, right?
Twitter: @rickjnewman
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Elder Walter H. Mosby II of MI 9:05AM May 26, 2011
Lee Allen of CA 11:57AM May 24, 2011
busterfrogg of VA 5:59AM April 26, 2011