John Goodman - NCPA
The International Monetary Fund is warning that the U.S. national debt will exceed 100 of GDP within the next five years and economists both here and abroad are expressing alarm. The debt problem is mainly an entitlements problem and the entitlements problem is mainly a health care problem. How serious is it?
President Obama has appointed a commission on the federal debt (National Commission on Fiscal Responsibility and Reform) mainly focused on Social Security Medicare and Medicaid. To signal his seriousness about this venture the president has even gone so far as to put the newly passed health reform bill on the negotiating table although the ink on the new law is barely dry.
As I explained at The Health Care Blog the other day heres the bottom line: Our entitlement problems all stem from the fact that these programs are run like Bernie Madoff chain letters. Since payroll tax revenues are spent rather than invested workers are accumulating benefits that are not paid for. Implicitly we are creating huge obligations for generations not yet born people who never agreed to be part of the scheme and who will surely be worse off if they participate.
The worst possible outcome from the Commission would be a value-added tax (VAT) and other measures that have no other purpose than to temporarily shore up the Ponzi schemes and push the can down the road a bit. Real reform means converting our pay-as-you-go systems into funded systems for both Social Security and Medicare. Real reform means creating systems in which each generation saves and invests and pays its own way.
As of last years Social Security/Medicare Trustees report these two programs had an unfunded liability in excess of $107 trillion (see the table) about 6 ½ times the size of the entire economy. This is the excess of promises we have made over and above expected dedicated taxes and premiums. To avoid draconian benefit cuts or tax increases in future years we would need to have that $107 trillion in the bank earning interest today. But of course we do not.
The $107 trillion figure is based on looking indefinitely into the future. A different way of accounting is to use the method private companies and state and local governments now have to use. If we halted these programs tomorrow collecting no more taxes and allowing no more benefit accruals how much do we owe people for benefits they have already earned? Answer: $52 trillion more than three times the size of GDP!
Of more immediate concern is the cash flow problem these programs are creating. Social Security and Medicare combined are paying out more than they are taking in. As the baby boomers retire the deficit will grow dramatically. Currently we are using about 1 in every 7 general revenue dollars to cover the deficits in these two programs. By 2020 we will need more than 1 in 4. By 2030 we will need almost 1 in 2. (See the figure.)
What that means is that in order to balance the budget at current tax levels in just 10 years the federal government will need to cease doing about one out of every four (non-entitlement) things it has been doing. In just 20 years the government will need to stop doing about half of every other thing it has been doing. Clearly elderly entitlements are on a course to crowd out everything else the federal government is doing.
Note that this problem is mainly a health care problem. At nearly $86 trillion Medicares unfunded liability is almost six times the size of Social Securitys. Note also that these numbers do not include Medicaid which is almost as large as Medicare (including both state and federal spending) and which will be much larger than Medicare once the new health reform legislation is fully phased in.
Any day now we should be getting a new report from the Trustees of Social Security and Medicare. The immediate news interest will be in how the recently passed health reform legislation will affect the trust funds for these two programs. But this is a minor issue as far as the nations fiscal health is concerned. The real issue is whether we will muster the political will to enact reforms today that will become more painful to enact the longer we delay the inevitable.
