[Mb-civic] Speeches Ignore Impending US Debt Disaster

ean at sbcglobal.net ean at sbcglobal.net
Tue Sep 14 18:18:14 PDT 2004

Via NY Transfer News Collective  *  All the News that Doesn't Fit

San Francisco Chronicle - September 12, 2004

Speeches Ignore Impending US Debt Disaster
No mention of fiscal gap estimated as high as $72 trillion

by Carolyn Lochhead

Washington -- 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

"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 of 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

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

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

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

"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

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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