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The first of
the 77 million-strong Baby Boom generation will begin to retire in just
four years. The economic consequences of this fact -- as scary as they
are foreseeable -- are all but ignored by President Bush and Democratic
challenger John Kerry, who discuss just about everything but the
biggest fiscal challenge of modern times.
Yet whoever
wins the 2004 race will become the first U.S. president to confront
what sober-minded experts across the political spectrum describe as an
impending "fiscal catastrophe" lying right around the corner.
Astronomical
federal debt, coming due as the Baby Boom generation collects Medicare,
Medicaid and Social Security, is enormous enough to swamp the promises
both candidates are making to voters, whether for tax cuts, health
care, 40,000 more troops or anything else.
"Chilling" is
the word U.S. Comptroller General David Walker uses to describe the
budget outlook.
"The long-term
budget projections are just horrifying," added Leonard Burman,
co-director of tax policy for the Urban Institute. "I've got four
children and it really disturbs me. I just think it's irresponsible
what we're doing to them."
What these
numbers portend are crippling tax increases on workers, slashed
benefits for retirees, gutted budgets for homeland security, highways,
research and everything else, and an economic decline or a financial
collapse that devastates the middle class, as happened recently in
debt-strapped Argentina. Eventually, analysts insist, someone --
today's children or tomorrow's elderly or both -- will pay this debt.
Traditional
budget measures used by politicians and the press give what Walker and
many others call a highly misleading view of the U.S. debt. These focus
on publicly held debt already incurred, now at $4.5 trillion, or
10-year budget forecasts like the one released last week by the
Congressional Budget Office showing a record $422 billion deficit this
year and a $2.3 trillion 10-year deficit.
'Fiscal gap'
in the trillions
But these
figures, worrisome enough, are deceptive because they ignore future
liabilities such as Social Security and Medicare payments to the Baby
Boomers. An array of government and private analysts put the actual
U.S. "fiscal gap," which means all future receipts minus all future
obligations, at $40 trillion (Government Accountability Office) to $72
trillion (Social Security Board of Trustees).
These are not
sums, but present value figures, heavily discounted to show in today's
dollars what it would cost to pay off the debt immediately. The
International Monetary Fund estimates the gap at $47 trillion, the
Brookings Institution at $60 trillion.
"To give you
idea how big the problem is," said Laurence Kotlikoff, economics
chairman at Boston University, who has written extensively on the
subject, to close a $51 trillion fiscal gap, "you'd have to have an
immediate and permanent 78 percent hike in the federal income tax."
These
obligations are not imaginary. And unlike the 1980s and 1990s, economic
growth cannot bail out the government because the Baby Boom retirement
is at hand. Those born in 1946 will reach age 62 in 2008, allowing them
to take early retirement and receive Social Security benefits.
"It's a number
that's so large that people find it implausible, and so they don't
think about it," said Alan Auerbach, a UC Berkeley economist who
studies the issue and consults for the Kerry campaign. "But it's based
simply on the projections we have for Social Security and Medicare.
People aren't making these numbers up."
A pathbreaking
study by Jagadeesh Gokhale of the Federal Reserve Bank of Cleveland and
Kent Smetters, a former deputy assistant secretary at the Treasury --
commissioned by former Treasury Secretary Paul O'Neill -- estimated a
$44 trillion fiscal gap. It laid out a few painful options on how to
meet the liabilities:
-- More than
double the payroll tax, immediately and forever, from 15.3 percent of
wages to nearly 32 percent;
-- Raise
income taxes by two-thirds, immediately and forever;
-- Cut Social
Security and Medicare benefits by 45 percent, immediately and forever;
-- Or
eliminate forever all discretionary spending, which includes the
military, homeland security, highways, courts, national parks and most
of what the federal government does outside of the transfer payments to
the elderly.
Such
corrective actions grow more severe each year. Waiting just until 2008,
the end of the next presidency, would mean raising the payroll tax to
33.5 percent instead of 32 percent, the study found.
Gokhale said
that fresh numbers from the Medicare trustees show the fiscal gap has
since grown to $72 trillion, $10 trillion of that for Social Security
and an astonishing $62 trillion for Medicare, the government health
care program for the elderly.
"The long-term
picture is pretty bad," Gokhale said.
Election's
absent issue
These numbers
are seldom discussed, least of all in the 2004 presidential race.
Ironically, as the Baby Boom retirement has neared -- and the remedies
grow more painful -- political discussion has faded. Gone is Ross
Perot's anti-deficit crusade. Gone is Newt Gingrich's call for Medicare
restraint. Gone is Al Gore's "lockbox" for the Social Security surplus.
Instead, Kerry
and Bush promise only to halve the current deficit in four years --
"both (of them) relying on pretty imaginative accounting to get there"
said Burman -- while promising more spending and more tax cuts.
Yet today's
deficit is a tiny fraction of the government's actual liabilities,
which are so daunting they promise to make Bush's tax cuts a distant
memory and Kerry's health care plan a fantasy.
While Bush and
Kerry propose to address parts of the problem, "the numbers don't add
up on either side," Walker said.
Medicare makes
up the bulk of these liabilities, driven mainly by the expanding
elderly population and rapidly rising health costs. Social Security,
more often discussed as a looming problem, actually accounts for far
less in future debt.
While Congress
squabbles over whether the administration hid the new prescription drug
benefit's 10-year cost -- pegged by the White House at $534 billion
versus CBO's $395 billion -- the actual liability incurred by the new
drug benefit is estimated at $8 trillion to $12 trillion.
Kerry and
Democrats call the drug benefit inadequate. They would do little to
restrain Medicare costs other than allowing the importation of
price-controlled drugs from Canada.
Bush and
Republicans added the drug benefit along with costly subsidies to
providers. Even optimists do not expect their modest market reforms to
cut costs.
Promises,
promises
Kerry has
promised not to cut Social Security. "I will not cut benefits," he said
recently. "I will not raise the retirement age."
Democrats
generally cite "trust fund" numbers that show Social Security -- and
Medicare to a lesser extent -- remaining solvent for decades, even
though government officials repeatedly call the numbers an accounting
fiction. CBO director Douglas Holzt-Eakin last week said the funds
contain nothing but "electronic chits" that measure government
obligations to itself.
Bush proposes
adding private accounts to Social Security for younger workers, which
could reduce future government obligations, but would do so by
diverting a portion of the payroll tax, adding $1 trillion to the
short-term deficit. That might have been feasible when Bush took office
in 2000 facing a projected $5.6 trillion surplus, but the surplus is
gone. Similar plans in Congress that instead rely more on benefit cuts
have gone nowhere.
"The country's
absolutely broke, and both Bush and Kerry are being irresponsible in
not addressing this problem," Kotlikoff said. "This administration and
previous administrations have set us up for a major financial crisis on
the order of what Argentina experienced a couple of years ago."
If this sounds
far-fetched, former Bush Treasury Undersecretary Peter Fisher and
former Clinton Treasury Secretary Robert Rubin both alluded to such a
scenario at a June budget forum in Washington.
"Having been
involved in markets for a long, long time," Rubin said, "I can tell you
these things can change unexpectedly and without warning," referring to
potential financial market reactions to the U.S. fiscal position.
Fisher warned
of a "pivot point" when "the collective wisdom of bond traders thinks
that the deficit horizon has turned," adding, "Both Bob and I are
nervous."
The world has
seen fiscal imbalances of this sort before, in Asia and Russia in the
late 1990s and more recently in South America. Such financial panics
can be triggered by any number of events -- a flight from Treasury
bonds by the foreigners who buy much of the U.S. debt, for example --
if investors' views of the market, which are focused on the short term,
suddenly change.
"If you look
at financial crises, they occur seemingly overnight," said Kotlikoff.
"More and more pieces of straw drop on the camel's back, and all of a
sudden, the camel collapses. ... Nobody knew exactly what day Argentina
was going to go south or exactly what day Russia was going to default.
The timing is up for grabs."
But early
signs of a problem are now appearing, analysts said, starting with the
mounting deficits under Bush caused not just by the recession and
terrorist attacks, but also by enormous spending increases and tax
cuts. The brief window of surpluses that appeared during the late 1990s
economic boom offered a chance to address long-range liabilities, but
those surpluses now are gone.
"Maybe the
public doesn't want to hear it," Kotlikoff said. "Maybe politicians
think ... the American public can't understand the truth or hear the
truth or bear the truth. I think this is garbage. I think that people
care about their kids and grandchildren and need to know the dangers
facing them -- and us."
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