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The major entitlement programs--Social Security, Medicare, and Medicaid--constitute 40 percent of total federal spending. As entitlement spending increases, each year without action raises the cost of reform. As Federal Reserve Chairman Ben Bernanke told Congress last year, "The right time to start is 10 years ago."

Social Security's finances will decline due to a combination of over-generosity to early beneficiaries and changing demographics. Falling birth rates mean fewer new workers paying into the system, while rising life spans will increase the number of retirees claiming benefits. Between today and 2050, for instance, the United States will add 2.5 seniors over age 85 for each American under age 20, according to Americans for Generational Equity. As a result, Social Security's benefit costs will exceed its annual tax revenues beginning in 2017. By the late 2020s the system will run annual deficits exceeding $200 billion (in today's dollars) and the Social Security Trust Fund is projected to be exhausted by 2041.

Medicare and Medicaid face the same demographic problems as Social Security, plus one additional challenge: rapid increases in health care costs. Over the past three decades, health care costs have grown 2 percentage points faster each year than the economy as a whole. Health care cost inflation is a result of improved technology that makes new treatments available, rising incomes, and declining shares of total health spending paid out of pocket. Even without demographic changes, Medicare and Medicaid would face multi-trillion dollar deficits.

Closing Social Security's deficits will require a reduction in benefit growth, increases in taxes, or a rising eligibility age. President Obama's plans have focused on taxes. He proposes imposing a new payroll tax of between 2 percent and 4 percent on earnings over $250,000. In addition to the economic drag, this plan would solve only 15 percent of Social Security's long-term shortfall.

On health care, Mr. Obama has focused on increasing coverage among the working age population, not on restraining cost increases in Medicare and Medicaid. Mr. Obama aims to generate $2,500 in annual savings per family through better management and quality control in health care, but outside analysts are skeptical regarding how much and how quickly these reforms could produce savings.

President Obama has brought on a strong economic policy team. While health and pension reform is a daunting task, if the Obama administration works in good faith with Congressional Republicans and outside stakeholders, then progress on fixing the major entitlement programs is possible.

Andrew G. Biggs is a resident scholar at AEI.