The looming national benefit
By Dennis Cauchon and John Waggoner
TODAY; Oct 5, 2004
The long-term economic health of
the United States is threatened by $53 trillion in government debts and
liabilities that start to come due in four years when baby boomers begin to
retire. (Related graphic: U.S. economy threatened by aging of America)
The "Greatest Generation" and its baby-boom children have promised themselves
benefits unprecedented in size and scope. Many leading economists say that even
the world's most prosperous economy cannot fulfill these promises without a
crushing increase in taxes — and perhaps not even then.
President Bush nor John Kerry is addressing the issue in detail as they campaign
for the White House.
A USA TODAY analysis found that the nation's
hidden debt — Americans' obligation today as taxpayers — is more than five times
the $9.5 trillion they owe on mortgages, car loans, credit cards and other
This hidden debt equals $473,456 per household,
dwarfing the $84,454 each household owes in personal debt.
trillion is what federal, state and local governments need immediately — stashed
away, earning interest, beyond the $3 trillion in taxes collected last year — to
repay debts and honor future benefits promised under Medicare, Social Security
and government pensions. 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 that we will be unable to fulfill,"
Federal Reserve Chairman Alan Greenspan told the House Budget Committee last
month. (Related story: Americans' views on the benefit quandary)
and economists from both political parties warn that the nation's economy is at
risk from these fast-approaching costs. If action isn't taken soon — when baby
boomers are still working and contributing payroll taxes— the consequences may
be catastrophic, some economists say.
The worst-case scenario is a
sudden crisis — perhaps a major terrorist attack or a shutoff of oil 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 its deficits; 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 from falling incomes.
landing: The USA acts swiftly and becomes more like Europe. Taxes are higher,
retirement benefits are less generous but widely distributed; health care costs
are controlled; and the economy is sound but less productive.
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
retirement benefits from Social Security. The costs start mushrooming in 2011,
when the first boomers turn 65 and qualify for taxpayer-funded Medicare.
Early warning signs
Americans needn't wait until 2008 or 2011 to see firsthand the escalating costs
of these benefit programs. Medicare last month announced the largest premium
increase in the program's 39-year history. In 2004 alone, federal spending on
Medicare and Social Security will increase $45 billion, to $789 billion. That
one-year increase is more than the $28 billion budget of the Department of
Many economists say a failure to confront the nation's
debt promptly will only delay the inevitable.
"The baby boomers and
the Greatest Generation are delivering an economic disaster to their children,"
says Laurence Kotlikoff, a Boston University economist and co-author of The
Coming Generational Storm, a book about the national debt. "We should be ashamed
USA TODAY used official government numbers to compute
what the burden means to the average American household. To pay the obligations
of federal, state and local government:
• All federal taxes would have
to double immediately and permanently. A household earning $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 and permanently.
• Or, benefits for Social Security, Medicare and government pensions
would have to be slashed in half immediately and permanently. Social Security
checks would be cut from an average of $1,500 per month for couples to $750.
Military pensions would drop from an average of $1,782 per month to $891.
Medicare spending would fall from $7,500 to $3,750 annually per senior. The
Medicare prescription-drug benefit enacted last year would be canceled.
• Or, a combination of tax hikes and benefit cuts — such as a 50%
increase in taxes and a 25% reduction in benefits — would avoid the extremes but
still require painful changes that are outside the scope of today's political
debate. Savings also could come in the form of price controls on prescription
drugs, raising retirement ages and limiting benefits to the affluent.
Every solution has the potential to damage the economy by reducing disposable
income or diverting 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 Accountability Office and
respected think tanks such as the conservative American Enterprise Institute,
the liberal Brookings Institution and the non-partisan Urban
"Political leaders know this is a big problem," says Glenn
Hubbard, chairman of the Council of Economic Advisers for President Bush from
2001 to 2003. "I know the president is keenly aware. But in an election year,
it's not easy to talk about. The solutions may be very painful. If he is
re-elected, I think he will make this a top priority next year. I hope 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 there will be a day of reckoning."
Galbraith of the University of Texas in Austin is a rare optimist in this
debate. "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
Galbraith says the country can handle higher tax rates, as
Europeans do, and can save money by cutting spending elsewhere, such as on
defense, and by implementing a Canadian-style health care system that uses
private doctors and hospitals but has the government set prices and pay the
"We are an enormously rich country," he says. "Providing health
care and a modest living for our elderly is certainly something we can
Social Security was created in 1935 to help the
elderly avoid poverty during the Great Depression. Medicare was established in
1965 to provide health care for the elderly, who were finding it increasingly
difficult to afford medical care. But the aging of America and a declining 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 that long. But life expectancy for women has increased from 66 to 80
since 1940 and for men from 61 to 75.
Meanwhile, the birth rate has
dropped from 25 births per 1,000 residents in the 1950s to just 15 today. The
lower birth rate ultimately means fewer workers paying taxes to finance Social
Security and Medicare benefits for the rapidly growing population of people 65
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 rates would 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 for an 85-year-old
are double those of a 65-year-old. Federal spending per Medicare recipient will
average $7,500 this year. The official projection for 2050: $26,683 per
recipient in 2004 dollars.
A problem in
The scope of the problem is no secret in Washington.
Medicare and Social Security trustees report the obvious every year: The
system has no way to pay for itself, even under the rosiest scenarios. The
Congressional Budget Office regularly updates Congress on the liabilities.
Bush's budget for the fiscal year that began Friday spells out the
numbers in detail and concludes, "These long-term budget projections show
clearly that the budget is on an unsustainable path."
General David Walker, the government's chief accountant, travels the nation
warning of the impending crisis. "I am desperately trying to get people to
understand the significance of this for our country, our children, our
grandchildren," Walker says. "How this is resolved could affect not only our
economic security but our national security. We're heading to a future where
we'll have to double federal taxes or cut federal spending by 50%."
But documentation of the problem hasn't prompted political action to address it.
The $4.2 trillion 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 of the national debt.
instructed our politicians not to tell us about this problem," says Boston
University economist Kotlikoff. "If they even mention cuts to Social Security,
we vote them out of office."
To bring attention to the problem, USA
TODAY prepared a consolidated financial statement for taxpayers, similar to what
corporations give shareholders. The newspaper totaled federal, state and local
government liabilities, taken from official documents.
• Total hidden debt.
Federal, state and local governments today have debts and "unfunded liabilities"
of $53 trillion, or $473,456 per household. An unfunded liability is the
difference, valued in today's dollars, between what current law requires the
government to pay and what current law provides in projected tax revenue.
• Social Security. The retirement program has $12.7 trillion in
obligations it cannot meet for current workers and retirees at the current
Social Security tax rate.
• Medicare. The health care program has a
$30 trillion unfunded liability for people now in the 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
existing levels of benefits, tax rates and premiums. Medicare's new
prescription-drug benefit, which starts 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 the USA, was $11 trillion
"These numbers are staggering in their magnitude," says
economist Thomas Saving, whom Bush appointed as a public trustee on the Medicare
and Social Security board. "But when I testify before Congress, I'm the only one
saying, 'We have a funding problem.' Everyone else is testifying for more
Like a home
The $53 trillion in liabilities is like a mortgage
balance: That's what it would cost to pay off the debt now. The actual cost
would be higher because of interest payments. A $100,000 mortgage at 5%
interest, for example, actually requires $193,000 in income to repay over 30
Under corporate accounting rules, a corporation would record a
$100,000 liability on its books if it promised to pay $193,000 in medical
benefits over 30 years. That liability would reduce profits immediately, when
the promise was made, although the money would be paid over 30 years. Otherwise,
shareholders could be fooled into thinking that the company was 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
Government doesn't follow this accounting rule.
If it did, the federal deficit in 2004 would be $8 trillion, not $422 billion.
The $8 trillion reflects the value of new financial obligations Congress
approved without any way to pay for them, plus the year's operating
Government accounting rules are more lenient because, unlike
a business, Congress can take 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 elderly tomorrow and cease Social Security payments
the next day — or double or triple tax rates to pay the bills.
why AARP, a non-partisan lobbying group for people over 50, says the unfunded
promises of Medicare and Social Security are less worrisome than they
"The reason we make companies fund their pension liabilities
is because it's uncertain they'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 put aside 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 health system is the
issue, not Medicare.
Alan Auerbach, director of the Burch Center for
Tax Policy and Public Finance at the University of California-Berkeley, says
people are understandably skeptical about gloomy predictions. But he says these
numbers are not guesses.
"We can't predict major wars or major
inventions," he says. "But we do know the baby boomers aren't going to
disappear. We know pretty well that health care costs will rise because of new
technology. I wish these were worst-case scenarios, but they're rather cautious
best guesses. It could be much worse."
bill coming due
The heart of the problem is that the Greatest
Generation and baby boomers have promised themselves retirement benefits so
generous — and have contributed so little to financing them — that even the most
prosperous economy in history cannot pay the bill.
Consider a married couple
who throughout their lives earned the median income — the amount at which half
of Americans make more and half make less — and who will retire at age 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 Urban
Institute estimates. That's the present value of the benefit — what it's worth
today — not the larger amount the government will actually pay over the years.
But the couple would have paid only $43,300 in Medicare taxes (valued in 2004
dollars). Taxpayers lose $240,200 on the deal.
But the Medians' good
fortune doesn't end there. They also qualify for $22,900 in annual Social
Security benefits, which rise annually with inflation.
of the Social Security benefit: $326,000. Present value of Social Security taxes
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 the Medians paid in Medicare and Social Security taxes. It
spent that money as it came in on other things — defense, education, past
Medicare costs, etc. So the Social Security and Medicare 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 other taxpayers must
"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 under President Nixon who wrote the best seller Running on
Empty: How the Democratic and Republican 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 $609,500 that Mr. and Mrs. Median are
entitled to under Medicare and Social Security. And the Medians 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. And
Medicare benefits rise with soaring health care costs.
children would receive Social Security and Medicare benefits with a present
value of $884,000 in 2004 dollars when they turn 65, according to the Urban
Institute. That's 45% more than their parents would get.
now dean of the Columbia Business School in New York, the stakes are clear: "The
question is whether the political process will make gradual changes or we'll
wait for a crisis."
Contributing: Paul Overberg, Bruce