Based on a conversation I’m having elsewhere, I offer the following alternate way of thinking about our current deficit, and why the preferred Republican theory of deficit reduction (cut entitlements) is so fundamentally dishonest. This gets ever-so-slightly into the weeds of how the US budget works, so bear with me.
Broadly speaking, US taxes get go into three buckets. Medicare and Social Security have their own dedicated funding sources (if you have a look at your paycheck, you’ll see these), and these represent the first two buckets. The other bucket is the general fund, which pretty much covers everything that isn’t Medicare or Social Security; this is where your income taxes (as well as things like capital gains and corporate taxes) go. The deficit we have today – the trillion dollar shortfall that Republicans like to talk about ad nauseum – is in the general fund. Neither Medicare nor Social Security are currently running a deficit, though the trustees of these programs predict that in the future they will (more on this in a few moments). The general fund deficit is – as I’ve mentioned previously – almost entirely due to the output gap and the Bush tax cuts. Fix those two things, and you don’t have much of a general fund deficit at all.
Thus, observe the fundamental dishonesty of Republican attempts to fix the deficit: blow a giant hole in the general fund (via the Bush tax cuts and two off-budget wars (paying for the wars in Afghanistan and Iraq were never included in the budget; for PR reasons these were covered by separate appropriations so that their cost could be divorced from the actual budget)), and then after creating the hole insist on making cuts to currently solvent social insurance programs to close it.
It is true that on a multi-decade time horizon, both Social Security and Medicare are projected to be in deficit. This is owing not to these programs generosity (by first world standards Social Security is quite stingy), but rather due to a) a change in the proportion of retirees to workers, exacerbated by a trend toward labor’s share of income decreasing (payroll taxes apply only to wages, capital gains are exempt. There is evidence that capital is earning an increasing share of income, which means that tax revenue based on wages will necessarily decline) and b) healthcare cost inflation. With regards to a, fairly modest changes to the payroll tax and slight adjustments to benefits solve Social Security’s problems in perpetuity; with regards to b) no amount of cuts saves us; eventually the healthcare system devours the entire domestic economy. This is why we need real healthcare reform.
Furthermore: it probably does not make sense to address problems that are decades away. On a multi-decade time horizon, the economy (both macro and political) will be dominated by unpredictable events. Pick any year in the twentieth century, and imagine trying to predict where the US would be thirty years later. It’s impossible to come up with anything that represents where we ended up. There’s a very compelling argument to be made that we shouldn’t move to try and fix Social Security and Medicare until they’re actually facing a shortfall, because there’s a decent chance that random events will erase or postpone the shortfall, whereas if we fix it there is a (probably rather high) chance that Congress cocks up the fix anyway in the future. Remember, there’s nothing Congress can do today that tomorrow’s Congress can’t undo!