the looming national benefit crisis

7/31/2019 The Looming National Benefit Crisis

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The looming national benefit crisisBy Dennis Cauchon and John Waggoner, USA TODAY

The long-term economic health of the United States is threatened by $53 trillion ingovernment debts and liabilities that start to come due in four years when baby boomersbegin to retire. (Related graphic: U.S. economy threatened by aging of America)The "Greatest Generation" and its baby-boom children have promised themselves benefitsunprecedented in size and scope. Many leading economists say that even the world's mostprosperous economy cannot fulfill these promises without a crushing increase in taxes and perhaps not even then.

Neither President Bush nor John Kerry is addressing the issue in detail as they campaignfor the White House.

A USA TODAY analysis found that the nation's hidden debt Americans' obligationtoday as taxpayers is more than five times the $9.5 trillion they owe on mortgages, carloans, credit cards and other personal debt.

This hidden debt equals $473,456 per household, dwarfing the $84,454 each householdowes in personal debt.

The $53 trillion is what federal, state and local governments need immediately stashedaway, earning interest, beyond the $3 trillion in taxes collected last year to repay debtsand honor future benefits promised under Medicare, Social Security and governmentpensions. And like an unpaid credit card balance accumulating interest, the problem grows

by more than $1 trillion every year that action to pay down the debt is delayed.

"As a nation, we may have already made promises to coming generations of retirees thatwe will be unable to fulfill," Federal Reserve Chairman Alan Greenspan told the HouseBudget Committee last month. (Related story: Americans' views on the benefit quandary)

Greenspan and economists from both political parties warn that the nation's economy is atrisk from these fast-approaching costs. If action isn't taken soon when baby boomers arestill working and contributing payroll taxes the consequences may be catastrophic, someeconomists say.

The worst-case scenario is a sudden crisis perhaps a major terrorist attack or a shutoff ofoil from the Middle East that triggers a loss of confidence by investors in the U.S.economy. Foreign investors refuse to lend more money to the government to finance itsdeficits; drastic tax increases and benefit cuts occur suddenly; the dollar's value plummets,which raises the cost of imported goods; and a severe recession or depression results fromfalling incomes.


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A softer landing: The USA acts swiftly and becomes more like Europe. Taxes are higher,retirement benefits are less generous but widely distributed; health care costs arecontrolled; and the economy is sound but less productive.

Big payments on the debt start coming due in 2008, when the first of 78 million baby

boomers the generation born from 1946 to 1964 qualify at age 62 for early retirementbenefits from Social Security. The costs start mushrooming in 2011, when the firstboomers turn 65 and qualify for taxpayer-funded Medicare.

Early warning signs

But Americans needn't wait until 2008 or 2011 to see firsthand the escalating costs of thesebenefit programs. Medicare last month announced the largest premium increase in theprogram's 39-year history. In 2004 alone, federal spending on Medicare and Social Securitywill increase $45 billion, to $789 billion. That one-year increase is more than the $28billion budget of the Department of Homeland Security.

Many economists say a failure to confront the nation's debt promptly will only delay theinevitable.

"The baby boomers and the Greatest Generation are delivering an economic disaster totheir children," says Laurence Kotlikoff, a Boston University economist and co-author ofThe Coming Generational Storm, a book about the national debt. "We should be ashamedof ourselves."

USA TODAY used official government numbers to compute what the burden means to theaverage American household. To pay the obligations of federal, state and localgovernment:

All federal taxes would have to double immediately and permanently. A householdearning $100,000 a year would see its federal taxes double from an average of about$20,000 to $40,000 a year. All state taxes would have to increase 20% immediately andpermanently.

Or, benefits for Social Security, Medicare and government pensions would have to beslashed in half immediately and permanently. Social Security checks would be cut from anaverage of $1,500 per month for couples to $750. Military pensions would drop from anaverage of $1,782 per month to $891. Medicare spending would fall from $7,500 to $3,750annually per senior. The Medicare prescription-drug benefit enacted last year would becanceled.

Or, a combination of tax hikes and benefit cuts such as a 50% increase in taxes and a25% reduction in benefits would avoid the extremes but still require painful changesthat are outside the scope of today's political debate. Savings also could come in the formof price controls on prescription drugs, raising retirement ages and limiting benefits to theaffluent.


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Every solution has the potential to damage the economy by reducing disposable income ordiverting economic resources.

The estimates computed by USA TODAY are similar to ones by government watchdog

agencies such as the Congressional Budget Office and the Government AccountabilityOffice and respected think tanks such as the conservative American Enterprise Institute, theliberal Brookings Institution and the non-partisan Urban Institute.

"Political leaders know this is a big problem," says Glenn Hubbard, chairman of theCouncil of Economic Advisers for President Bush from 2001 to 2003. "I know thepresident is keenly aware. But in an election year, it's not easy to talk about. The solutionsmay be very painful. If he is re-elected, I think he will make this a top priority next year. Ihope so."

"Economists agree this cannot go on," says Joseph Stiglitz, President Clinton's chief

economic adviser from 1995 to 1997. "We can borrow and borrow, but eventually therewill be a day of reckoning."

Economist James Galbraith of the University of Texas in Austin is a rare optimist in thisdebate. "I'm not at all concerned about Medicare or Social Security," Galbraith says."Unless the government goes broke, Medicare isn't going to go broke, and the U.S.government isn't going to go broke because it can print money."

Galbraith says the country can handle higher tax rates, as Europeans do, and can savemoney by cutting spending elsewhere, such as on defense, and by implementing aCanadian-style health care system that uses private doctors and hospitals but has thegovernment set prices and pay the bills.

"We are an enormously rich country," he says. "Providing health care and a modest livingfor our elderly is certainly something we can afford."

An aging population

Social Security was created in 1935 to help the elderly avoid poverty during the GreatDepression. Medicare was established in 1965 to provide health care for the elderly, whowere finding it increasingly difficult to afford medical care. But the aging of America and adeclining birth rate have put these programs on a collision course with financial reality.

When the government set 65 as the retirement age in the 1930s, most people didn't live thatlong. But life expectancy for women has increased from 66 to 80 since 1940 and for menfrom 61 to 75.

Meanwhile, the birth rate has dropped from 25 births per 1,000 residents in the 1950s tojust 15 today. The lower birth rate ultimately means fewer workers paying taxes to finance


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Social Security and Medicare benefits for the rapidly growing population of people 65 andover.

Medicare has had about 3.3 workers paying taxes for every recipient for the past 30 years.Baby boomer retirements will reduce that to just two workers supporting every Medicare

recipient in 2040.

Immigration has helped offset some of the decline in birth rates. But immigration rateswould have to increase by five or 10 times above the recent peak of 1.2 million in 2001,legal and illegal to provide enough workers and their payroll taxes to boost Medicare.

Medicare recipients are growing older and more expensive, too. Annual medical costs foran 85-year-old are double those of a 65-year-old. Federal spending per Medicare recipientwill average $7,500 this year. The official projection for 2050: $26,683 per recipient in2004 dollars.

A problem in plain view

The scope of the problem is no secret in Washington.

Medicare and Social Security trustees report the obvious every year: The system has noway to pay for itself, even under the rosiest scenarios. The Congressional Budget Officeregularly updates Congress on the liabilities.

Bush's budget for the fiscal year that began Friday spells out the numbers in detail andconcludes, "These long-term budget projections show clearly that the budget is on anunsustainable path."

Comptroller General David Walker, the government's chief accountant, travels the nationwarning of the impending crisis. "I am desperately trying to get people to understand thesignificance of this for our country, our children, our grandchildren," Walker says. "Howthis is resolved could affect not only our economic security but our national security. We'reheading to a future where we'll have to double federal taxes or cut federal spending by50%."

But documentation of the problem hasn't prompted political action to address it. The $4.2trillion national debt has generated some debate in Congress and the presidential campaign.But the government's obligations for Medicare and Social Security are 10 times the size ofthe national debt.

"We have instructed our politicians not to tell us about this problem," says BostonUniversity economist Kotlikoff. "If they even mention cuts to Social Security, we votethem out of office."

Grim financial statement


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To bring attention to the problem, USA TODAY prepared a consolidated financialstatement for taxpayers, similar to what corporations give shareholders. The newspapertotaled federal, state and local government liabilities, taken from official documents.

Key findings:

Total hidden debt. Federal, state and local governments today have debts and "unfundedliabilities" of $53 trillion, or $473,456 per household. An unfunded liability is thedifference, valued in today's dollars, between what current law requires the government topay and what current law provides in projected tax revenue.

Social Security. The retirement program has $12.7 trillion in obligations it cannot meet forcurrent workers and retirees at the current Social Security tax rate.

Medicare. The health care program has a $30 trillion unfunded liability for people now inthe system as workers or beneficiaries. The $30 trillion reflects the value today of the more

than $200 trillion in deficits over 75 years to cover current workers and retirees at existinglevels of benefits, tax rates and premiums. Medicare's new prescription-drug benefit, whichstarts in 2006, accounts for $6.9 trillion of the program's financial ill health.

How much is $30 trillion? The gross domestic product, the entire economic output of theUSA, was $11 trillion last year.

"These numbers are staggering in their magnitude," says economist Thomas Saving, whomBush appointed as a public trustee on the Medicare and Social Security board. "But when Itestify before Congress, I'm the only one saying, 'We have a funding problem.' Everyoneelse is testifying for more benefits."

Like a home mortgage

The $53 trillion in liabilities is like a mortgage balance: That's what it would cost to pay offthe debt now. The actual cost would be higher because of interest payments. A $100,000mortgage at 5% interest, for example, actually requires $193,000 in income to repay over30 years.

Under corporate accounting rules, a corporation would record a $100,000 liability on itsbooks if it promised to pay $193,000 in medical benefits over 30 years. That liability wouldreduce profits immediately, when the promise was made, although the money would bepaid over 30 years. Otherwise, shareholders could be fooled into thinking that the companywas better off than it really was.

In fact, the company had committed $193,000 in future revenue worth $100,000 today to a retiree and couldn't use the money for shareholder profits.

Government doesn't follow this accounting rule. If it did, the federal deficit in 2004 wouldbe $8 trillion, not $422 billion. The $8 trillion reflects the value of new financial


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obligations Congress approved without any way to pay for them,plus the year's operatingdeficit.

Government accounting rules are more lenient because, unlike a business, Congress cantake whatever money it needs through taxes and renege on promises by passing new laws.

Theoretically, the president and Congress could end all health care for the elderlytomorrow and cease Social Security payments the next day or double or triple tax ratesto pay the bills.

That's why AARP, a non-partisan lobbying group for people over 50, says the unfundedpromises of Medicare and Social Security are less worrisome than they appear.

"The reason we make companies fund their pension liabilities is because it's uncertainthey'll be around in the future. That doesn't apply to government," says John Rother,AARP's research director. "The size of the liabilities isn't relevant, nor is how much we putaside today. What matters is how healthy will the economy be in the future."

He agrees that Medicare has a long-term funding problem but says the nation's entire healthsystem is the issue, not Medicare.

Alan Auerbach, director of the Burch Center for Tax Policy and Public Finance at theUniversity of California-Berkeley, says people are understandably skeptical about gloomypredictions. But he says these numbers are not guesses.

"We can't predict major wars or major inventions," he says. "But we do know the babyboomers aren't going to disappear. We know pretty well that health care costs will risebecause of new technology. I wish these were worst-case scenarios, but they're rathercautious best guesses. It could be much worse."

A bill coming due

The heart of the problem is that the Greatest Generation and baby boomers have promisedthemselves retirement benefits so generous and have contributed so little to financingthem that even the most prosperous economy in history cannot pay the bill.

Consider a married couple who throughout their lives earned the median income theamount at which half of Americans make more and half make less and who will retire atage 65 next year. They earned $46,400 in their final year of work.

Mr. and Mrs. Median would get a joint Medicare benefit valued at $283,500, the UrbanInstitute estimates. That's the present value of the benefit what it's worth today notthe larger amount the government will actually pay over the years. But the couple wouldhave paid only $43,300 in Medicare taxes (valued in 2004 dollars). Taxpayers lose$240,200 on the deal.


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But the Medians' good fortune doesn't end there. They also qualify for $22,900 in annualSocial Security benefits, which rise annually with inflation.

Present value of the Social Security benefit: $326,000. Present value of Social Securitytaxes paid over a lifetime: $198,000.

Net loss to taxpayers: $128,000.

And the situation is worse than that. The federal government didn't save the money that theMedians paid in Medicare and Social Security taxes. It spent that money as it came in onother things defense, education, past Medicare costs, etc. So the Social Security andMedicare taxes paid by Mr. and Mrs. Median won't help offset the cost of their benefits.The Social Security and Medicare trust funds have no money, only IOUs that othertaxpayers must repay.

"These mythical trust funds are a financial oxymoron they can't be trusted and they

aren't funded," says Peter Peterson, a businessman and Commerce secretary underPresident Nixon who wrote the best seller Running on Empty: How the Democratic andRepublican Parties Are Bankrupting Our Future and What Americans Can Do About It.

Because the trust funds have been spent, taxpayers must come up with the full $609,500that Mr. and Mrs. Median are entitled to under Medicare and Social Security. And theMedians are a bargain compared with what their 45-year-old children will cost.

Social Security is structured so that future generations get increasingly large benefits. AndMedicare benefits rise with soaring health care costs.

The Medians' children would receive Social Security and Medicare benefits with a presentvalue of $884,000 in 2004 dollars when they turn 65, according to the Urban Institute.That's 45% more than their parents would get.

For Hubbard, now dean of the Columbia Business School in New York, the stakes areclear: "The question is whether the political process will make gradual changes or we'llwait for a crisis."

Contributing: Paul Overberg, Bruce Rosenstein


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