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
'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
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
-- 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
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
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.
Kerry has promised not to cut Social Security.
"I will not cut benefits," he said recently. "I will not raise the
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
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."