Reagan’s Cure for America's Debt Disease

Two programs, Medicare and Social Security, are the bulk of the problem. Here’s how to fix them.

By Martin Feldstein

The federal government’s most urgent domestic challenge is the exploding debt and deficit.

America’s debt nearly doubled during the Obama years, reaching 76% of gross domestic product in 2017. If nothing is done it will surpass 100% of GDP within a decade. The U.S. will then have one of the highest debt ratios in the industrial world—topped only by countries like Greece, Italy and Japan.

Most of the projected debt increase over the next 10 years is a result of the recent cuts to the personal income tax, including the lower rates, the big increase in the child credit, and the doubling of the standard deduction. The personal tax cuts were included in the legislation to get the congressional votes necessary to enact corporate tax reform, which was economically more important.

Those corporate provisions, including cutting the rate from 35% to 21% and changing the tax treatment of profits earned by foreign subsidiaries of U.S. companies, will spur higher productivity and raise real wages. They are not the main driver of the debt problem. Also not to blame, despite what many Trump critics have argued, is January’s boost to military spending, which will contribute relatively little to the increased debt. Instead this was a long-overdue correction to a military budget that had become dangerously low. It was important to enact both these priorities—corporate tax reform and increased military spending—while there was a political opportunity to do so.

Now attention must turn to deficit reduction. Shrinking future deficits without an economy-damaging tax increase means slowing the growth of government spending. Policy makers looking for savings must focus on two programs. Excluding interest on the debt, Social Security and Medicare account for two-thirds of the projected increase in outlays during the next decade.

Reagan’s Cure for America's Debt Disease
Photo: istock/getty images 

Between 2018 and 2027, Social Security outlays are projected to grow by 1% of GDP, and Medicare by 1.4% of GDP. Together they would account for the entire 2.4% rise in the deficit as a share of GDP. Cutting their growth in half would reduce the 2027 deficit from 5.2% of GDP to 4% of GDP. That would start to shrink the future debt ratio from more than 100% of GDP back to today’s 76%. That isn’t good enough, but it’s a shift in the right direction. 

Slowing the growth of Social Security and Medicare doesn’t mean cutting actual benefits. It would therefore not violate President Trump’s campaign promise to “save Medicare, Medicaid and Social Security without cuts.”

President Reagan showed a politically viable way to slow the growth of Social Security benefits. In 1983 Congress raised the age for receiving full benefits from 65 to 67. That increase was designed to begin only after a long delay, so that no one then approaching retirement was affected. Even after the delayed start, the increases proceeded very slowly; they won’t take full effect until 2027. As a result of this gradual approach, there have been neither public protests of the plan nor legislative attempts to repeal it.

Since 1983, the average life expectancy for people in their mid-60s has increased by about three years. Raising the retirement age for full benefits by three years, from 67 to 70, would cut the future outlay for Social Security by about one-fifth, or 1% of GDP. It would be even better to pass a law that automatically raises the age for full benefits as life expectancy improves. Exceptions could be made for people in strenuous occupations or for those whose Social Security records show low lifetime earnings.

Mr. Trump has already shown a willingness to act on Medicare. The White House’s fiscal 2019 budget called explicitly for slowing the rise in Medicare outlays by $500 billion over 10 years, or about 5% of the program’s budget. Much more is needed.

Medicare receives a portion of the payroll tax, as well as premiums that patients are charged for outpatient and drug coverage. But these funds cover only about half of Medicare’s total outlays. Beneficiaries pay no premiums for inpatient coverage under Medicare Part A, regardless of their incomes. Why should I receive Medicare hospital benefits without paying any premium if I am still working and well-paid?

Under current law, about 95% of enrollees in Medicare’s outpatient and drug coverage pay a “standard” premium that covers only about 25% of the cost of their benefits. Starting in 2019, those with incomes of $500,000 or higher will be required to pay premiums that cover 85% of their costs. But that affects fewer than 1% of enrollees. 

The premiums most Medicare enrollees pay for outpatient coverage could be gradually increased. At the same time, premiums could be extended to cover inpatient coverage. Low-income retirees could be exempted, or the premium increases could be scaled to income.

There are many other options for slowing the rise in government outlays for Social Security and Medicare. Congress and the Trump administration must develop a plan to reduce the long-run cost of these programs before the national debt threatens the stability of the economy.

Mr. Feldstein, chairman of the Council of Economic Advisers under President Reagan, is a professor at Harvard and a member of the Journal’s board of contributors.

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