From President Obama's State of the Union address, one might have come away with the impression that the nation's finances are hunky-dory. Obama suggested that most of the heavy lifting on deficit reduction is already done, and that the rest can be accomplished by making minor adjustments to spending and closing tax loopholes on wealthier Americans.
Obama said he's already signed $2.5 trillion in deficit reduction over the last several years and argued that's more than halfway to the $4 trillion needed to address the deficit problem. A Congressional Budget Office report released last week assumes that the automatic spending cuts under sequestration provide an additional $1.2 trillion in 10-year deficit reduction. In other words, the CBO already assumes deficit reduction roughly in line with what Obama claimed was the goal.
Even under this CBO scenario, however, the nation's total debt obligations are still projected to grow from $16.5 trillion to $26 trillion by 2023. By another measure, the public debt (which excludes money the Treasury owes to other government accounts, such as the Social Security system) is projected to be 77 percent of GDP by 2023, or more than double the 36.3 percent that it was in 2007, before the onset of the recent economic crisis. Of course, this is just over the next decade. The budget picture gets far worse in the following decades as the retiree population swells and health care costs grow.
Throughout his presidency, Obama has advanced the idea that the nation's mounting debt problem could be solved by "modest adjustments" to entitlement programs, mainly Social Security, Medicare and Medicaid, and by asking wealthy taxpayers to pay just a little bit more. On Tuesday night, he made a few such modest proposals -- a change to the way Medicare buys drugs and an increase in premiums for seniors with higher incomes, who already pay more than their lower-income peers. These steps, taken together, save a mere $186 billion over 10 years, which barely begins to scratch the surface of the nation's long-term liabilities.
In Senate testimony Tuesday, CBO Director Doug Elmendorf contradicted Obama's view that mere tinkering and tax hikes on the rich would be enough. Under questioning from Sen. Ron Johnson, R-Wis., who highlighted the dire state of Medicare and Social Security finances, Elmendorf stated, "It's very difficult, Senator, if you look at our projections, to see how one could put the budget ultimately on a sustainable path without making significant changes in either of those large benefit programs or in taxes paid by a broad cross-section of Americans."
In other words, if Obama won't go beyond light tinkering with entitlements, he's going to need to acknowledge the need for large-scale tax hikes on the middle class -- something he failed to do during his first term in office, and also in Tuesday night's speech.