The Real Fiscal Danger
Published on May 29th, 2003 by J.T in MoneyDirect from the White House’s Office of Management and Budget about the FY2004 Budget.
THE REAL FISCAL DANGER
As noted frequently in this document, the federal government appears likely to spend more than it takes in for at least the next few years. Although the resulting deficits are manageable by any reasonable standard, they are cause for legitimate concern and attention. But whatever judgment one reaches about the deficit of this year or even the next several years combined, these deficits are tiny compared to the far larger built-in deficits that will be generated by structural problems in our largest entitlement programs. Social Security and Medicare combine to provide financial support to 39 million seniors-14 percent of our population-and account for one-third of total federal spending. As our population ages and health care costs continue to escalate, the costs of these programs will grow enormously, in fact, so rapidly that they will threaten to overwhelm the rest of the budget.Americans have often heard that Social Security and Medicare are in deep trouble financially, and the simple reason is that the benefits promised under these programs will soon far outstrip their dedicated revenues. Over the long term, the actuaries of the Social Security Administration project that the cost of all benefits paid to current beneficiaries and promised to future retirees exceed Social Security revenues by almost $5 trillion. The Medicare shortfall is even worse at more than $13 trillion.
Citizens and policymakers rightly monitor and debate the size of the national debt, which stands at $3.5 trillion in public hands, with another $2.7 trillion credited to various government trust funds. But in 2002 the combined shortfall in Social Security and Medicare of nearly $18 trillion was about five times as large as today’s publicly held national debt. In other words, it would take an additional $18 trillion in today’s dollars to pay for the obligations of these systems as they are now constituted. This is roughly the equivalent of the total income Americans will earn over the next year and a half. Expressed yet another way, the combined shortfall in Social Security and Medicare was eight times the amount of total government spending in 2002.
The figures on Social Security and Medicare’s unfunded promises are subject to some variation depending on the underlying assumptions made. (The analysis is presented in much greater detail in the Stewardship chapter in the Analytical Perspectives volume.) However, no conceivable combination of reasonable assumptions can erase the problems in Social Security or Medicare. The Social Security and Medicare shortfalls compel change. They must not be left hanging over the heads of our children and grandchildren. The longer the delay in enacting reforms, the greater the danger, and the more drastic the remedies will have to be. The Administration is committed to making these two programs financially sustainable so they can continue to serve our seniors now and in the future without jeopardizing the financial security of generations to come.
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The administrations is committed to reform, the best way to reform a program that you don’t like is to ensure that there is no money for it down the line when its needed. For instance, increasing debt levels to nearly unsustainable levels through the use of a combination of tax cuts and budget overruns.
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Given the financial challenges faced by Medicare in the future, the Congress must be extremely careful that legislative changes not add to long-term unfunded promises. As a case in point, the bills that advanced furthest in the last Congress would have increased the Medicare long term unfunded promise by an estimated $4.6 trillion and $6.9 trillion, respectively.
These high and perpetual deficits make it obvious that Social Security and Medicare are in deep trouble. But it can still be difficult to grasp the true magnitude of the problems they pose for future workers. These are highly complex programs extending over many generations. For the same reasons, it is inadequate to assess the long-run financial consequences of a proposed change in these programs over a one-, five-, or even a 10-year horizon. What a proposed reform is estimated to cost over its first five or 10 years is less important than whether it reduces or worsens the unfunded (and unfundable) liabilities of the system. Hence the importance of taking a longer time horizon, for example, as is reflected in the 75-year estimates.
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Hence, more tax cuts and budget overruns, but only talking about the costs of these over thext 3-5 years. The administration would never dare to talk about the long term costs of their tax cut programs.
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What Does $18 Trillion Mean to You?
While the analysis may be unfamiliar to many Americans, the meaning of the results is straightforward. Total household wealth in the United States was $40.2 trillion in 2002. The combined Social Security and Medicare shortfall is nearly $18 trillion. This means that the federal government would have to confiscate almost half of all household wealth to have the resources necessary to close both these programs’ future financing gaps.
Of course, it is not necessary to pre-fund promised Social Security and Medicare benefits immediately. In theory, the Congress could enact a 7.1 percent permanent increase in the payroll tax to close the combined shortfalls over time. This would mean a permanent payroll tax increase to a rate of 22.4 percent, amounting to about $3,000 in additional taxes every year for an average family. A tax increase of this magnitude is unthinkable. It would devastate the economy, job growth, and family finances, but it does serve to indicate the magnitude of the problem we would be leaving to future generations if we fail to act.
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Personally, I like this quote “[t]his means that the federal government would have to confiscate almost half of all household wealth to have the resources necessary to close both these programs’ future financing gaps.” Nothing like attempting to scare the hell out of people by using inflamatory language like confiscate! The government would not need to confiscate anything, the government will need to reinstitute taxes that already existed because a fiscally irresponsible adminstration decided that spending alot of money today without any insight on how to pay for the debts in the future was good for the company. The Republicans stated after attempting to reform Bankruptcy laws that too many people were running up high bills on credit cards and were acting irresponsibly by just trying to get out of their debts through the bankruptcy process and this needed to be stopped. Now, current administration is running up HUGE debts, not on their own credit, but on the credit of every American. The US does not have a bankruptcy court to go to to get these debts wiped away. These debts exist as long as they are unpaid.
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Today’s seniors and near retirees are counting on Social Security and Medicare to provide retirement income and health insurance. They should never doubt that promises made will be promises kept. But it is also true that these programs cannot continue as they are structured today. We must make a different kind of promise to the retirees of tomorrow. We must not delay in enacting reforms to make these programs financially sustainable. Delay erodes the confidence of today’s workers that Social Security and Medicare will be there for them when they retire. And delay increases the financial threat that we leave to our children and grandchildren.
Throughout most of the 90s the govenrment ran surplusses that gave all Americans the belief that the US budget was heading in the correct direction. That belief no longer exists, but is just a memory. I’m afraid that it will always remain a memory.
