Critics of government spending often describe the ballooning cost of Social Security and Medicare in out years as something of a runaway fiscal train. What tends to be missed in these conversations is the simple fact that, because of their huge numbers, it makes perfect sense -- and is perfectly fine -- that government spending would rise as the Baby Boomers retire. The better question is how much spending is too much?
The Boomers have always required extra public investments. For example, U.S. spending on education soared from 1.5 percent of GDP in 1945, when the first Boomers were born, to nearly 4 percent of GDP in the 1960s -- as America paid for schools and teachers for 77 million kids. Spending on public universities exploded from the 1960s into the early 1980s as these same kids went college.
And education wasn't the only big expense for Boomers. Spending on transportation also rose by over 70 percent between 1945 and 1960 as millions of new homes were built in the suburbs to house all these kids, requiring roads and mass transit to link together these new communities.
Taken together, U.S. government outlays for education and transportation increased by about 3.5 percentage points from the 1940s through the 1970s. If we include other new government spending to pay for a far larger population, like in the area of criminal justice, U.S. government at all levels easily spent 5 extra percentage points of GDP to deal with the arrival and maturation of the Baby Boomers.
Now the U.S. is facing the back end expense of the Boomers as this massive cohort retires. According to the Congressional Budget Office, spending on Social Security will rise from 4.9 percent of GDP in 2013 to 6.2 percent in 2038, a 1.3 percent rise. Spending on Medicare is slated to rise from 3 percent of GDP today to 4.9 percent in 2038 -- a 1.8 percent rise. Toss in expanding Medicaid expenditures (for nursing homes) and various local programs for seniors and, all told, we're looking at increasing government spending by about 3.5 percentage points of GDP to pay for the Boomers' retirement.
In other words, the back end public costs for the Boomers are comparable, or even lower, than the front end costs. So there is nothing at all that resembles a runaway spending train here that can be blamed on old people.
Now, that doesn't mean we don't have a major fiscal challenge; we do, mainly because of all the needless deficit spending of the past three decades, which included spending all the surpluses generated by payroll taxes that were supposed to be saved to pay for the Boomers' retirement.
But it's important to separate out serious fiscal management challenges from the question of whether our society is facing unreasonable or excessive costs to pay for the Boomers to retire. We are not. And this will be especially true if we can substantially lower healthcare expenditures by bigger reforms to the healthcare system in coming years.
Here's a radical suggestion: If we need to increase government by 3.5 percentage points to pay for the retirement of the biggest generation in American history ever to hit old age, maybe we should simply accept that expense -- like we accepted the expense of sending these same people to school -- and just raise taxes to pay for it?
Crazy idea, I know.