Will Ryan's Budget Plan Get Tea Party Endorsement?

For a long time I have maintained that a significant tax increase will be necessary if we are to avoid the fate of Greece, which is in the midst of a fiscal meltdown. If the bankruptcy of a little country like that can cause world financial markets to tank, imagine what a potential U.S. bankruptcy would do to your 401(k).

Whenever I make this point people always complain that I haven't considered the option of cutting spending. The reason I haven't is that the magnitude of spending cuts that would be required to prevent the need for higher revenues would be politically impossible to achieve. We saw proof of this when Barack Obama proposed cutting Medicare spending by a small amount to fund health coverage for the uninsured, and the Republican Party's official position was to oppose any cut for any reason. We saw more proof in how quickly Republican leaders distanced themselves from a detailed budget plan recently put forward by Rep. Paul Ryan of Wisconsin, ranking Republican on the House Budget Committee.

Ryan unveiled the latest version of his plan on Jan. 27 and, to his credit, even got the Congressional Budget Office to score it. According to the CBO, under the Ryan plan federal debt as a share of the gross domestic product (GDP) would rise from 61% this year to 100% in the year 2045 before falling to zero in 2080. Under the CBO's baseline budget projection, debt would equal 270% of GDP in 2045 and 716% in 2080.

Ryan achieves this result without any tax increase at all--100% of the debt reduction comes from lower spending. It is, in short, the budgetary Holy Grail for the tea party crowd. But would they actually support it if they knew exactly what it would entail to abolish the federal debt solely by cutting spending?

Many polls show that the vast majority of Americans have no idea of the true composition of federal spending. According to a recent Rasmussen survey, just 35% of Americans know that Social Security, Medicare and national defense spending constitute more than 50% of the federal budget. Polls consistently show that most people grossly overstate the percentage of foreign aid in the budget. A 2001 poll showed that half of all Americans thought foreign aid comprised at least 20% of the budget, and the average response was 25%. In fact, foreign aid is less than 1% of the budget and has been for decades.

Consequently, most people tend to think that balancing the budget is a relatively easy task just requiring political will, something that would not affect them personally. Even members of Congress often give the impression that all we have to do is eliminate earmarks and pork barrel spending and that would be enough. In fact, according to Citizens Against Government Waste, a watchdog group, there was only $19.6 billion of pork in the budget last year, less than 1% of federal spending.

The truth is that the big money is in two federal programs: Social Security and Medicare. However, it is extremely rare to hear any of those concerned about federal spending target these programs for cuts. One reason is that Medicare alone covers about 45 million people, 22% of the voting-age population. Moreover, according to Census Bureau data, those over age 65--virtually all of whom qualify for Medicare--vote in the highest percentages of any age group. Consequently, any effort to reduce benefits for this population is going to confront strenuous opposition, which explains Republican pandering on Medicare during the health care debate.

Therefore, it is really heroic that Rep. Ryan did not shrink away from confronting head-on the necessity of slashing entitlements for the elderly in order to achieve his goal of abolishing the federal debt without an increase in the tax-to-GDP ratio.

On Social Security Ryan would reduce initial benefits for retirees by changing the benefit formula. Private accounts would be established immediately for those under age 55 that would be partially funded by payroll taxes.

Ryan would also raise the age to qualify for Medicare from 65 to 69 years and 6 months for people born in the year 2022. After the year 2021, the Medicare program as we know it would cease to exist. Instead of receiving health benefits through Medicare, those over age 65 would instead receive government vouchers worth $5,900. These vouchers would be adjusted for age and health status, which would put the average voucher at $11,000. Medicare beneficiaries would buy private health insurance with the vouchers.

These amounts are considerably less than estimated Medicare spending per enrollee in 2022, so there is a sharp cut in spending right off the bat. Furthermore, these amounts would only be indexed to half the historical rate of price inflation for medical care. This means that the real, inflation-adjusted voucher amount would fall continuously. To cover the shortfall, Medicare beneficiaries would either have to pay out of their own pockets for medical care or buy private insurance over and above what could be purchased with the Medicare vouchers.

Workers would also likely see a sharp reduction in their health benefits as well because Ryan would abolish the tax exclusion for health insurance. In other words, workers would have to treat whatever their employer pays for health insurance as if it were cash income. Workers would instead receive a new tax credit not to exceed $5,700 per family. It is not clear whether the credit amount would be indexed to inflation. This provision would constitute a significant tax increase for many workers.

In short, the core of Ryan's proposal is to implement George W. Bush's plan to privatize Social Security, which got virtually no public support even when the stock market was booming, and essentially abolish Medicare altogether while raising taxes on the health benefits of most workers. He basically assumes that the market for health insurance would somehow adjust to prevent a significant cut in the quality of health care.

The Ryan plan is, of course, politically ludicrous. It would be impossible to get Congress to even implement one of its major provisions, let alone all of them simultaneously. And I say this as someone who in principle supports many of the ideas in his plan. For example, I believe we must raise the retirement age, and it's hard to see how we can meaningfully reform the health system to reduce cost inflation as long as health insurance is free of taxation. But I don't delude myself that it is possible to implement such changes absent a major transformation in political attitudes or conditions that do not now exist.

That is why I think it is far more realistic to assume that nothing remotely like the Ryan plan has a snowball's chance in you-know-where. More than likely, we will continue on our present course with minor nibbles around the edges of programs like Social Security and Medicare. The only major benefit cut I can envision at all is a rise in the age to qualify for benefits, but that is only because it would have to be phased in so slowly that no one anywhere near retirement would be affected.

That is why I think tax increases will be the default position when a Greece-like fiscal nightmare hits, which is inevitable if current tax and spending trends continue. Those that are adamantly opposed to any tax increase to deal with this inevitability must--I repeat, must--be willing to support cuts in Social Security and Medicare of the magnitude proposed by Rep. Ryan, and they must begin working to implement those cuts today.

In my opinion, support for the Ryan plan must be the minimum requirement for anyone who considers themselves members of the tea party brigade and any politician seeking its endorsement. If those like former Alaska governor Sarah Palin, the current darling of the tea party crowd, are unwilling to immediately and unequivocally endorse the Ryan plan or put forward something equally serious and comprehensive, then in my opinion they have no credibility on the budget and no right to oppose the sorts of tax increases that I believe are unavoidable.

I think it is irresponsible to say, as almost all tea party goers do, that they are unalterably opposed to tax increases without specifying spending cuts--large cuts in popular programs that go far beyond foreign aid, earmarks and even a budget freeze. And if they are serious they must admit that coming anywhere close to budget balance cannot be done without slashing Social Security and Medicare benefits. There's no way around that and anyone who says so is either ignorant or a fool.

When I see people like Paul Ryan addressing large tea party conventions and receiving standing ovations for his budget plan, maybe I will begin to think it is possible to avoid a massive tax increase. But right now, I don't see even the tiniest glimmer of understanding among the tea party crowd about the true nature of our budget problem and what it would take to avoid a major tax increase.

The next time I see pictures of a tea party crowd I will be looking carefully for signs that say "Abolish Medicare," "Raise the Retirement Age" and "Support the Ryan Plan!" I won't hold my breath waiting.