Last Updated: Sun Jul 31, 2011 23:44 pm (KSA) 20:44 pm (GMT)

‘The mountain of debt they are not dealing with.’ Analysis by Paul J. Sullivan

The National Debt Clock, a billboard-size digital display showing the increasing US debt, near an office of the Internal Revenue Service (IRS)on Sixth Avenue July 26, 2011 in New York. (GETTY Photo)
The National Debt Clock, a billboard-size digital display showing the increasing US debt, near an office of the Internal Revenue Service (IRS)on Sixth Avenue July 26, 2011 in New York. (GETTY Photo)

With all of the hardened views and vituperative discussions on the short term issues of the temporary rise in the debt ceiling and budget cutting, albeit somewhat vague and indecisive, little is being done on the some of the major sources of the Everest-like mountain of debt that awaits the US in the coming decades.

Most of this mountain will be liabilities developing out of the Medicare, Social Security and other income support and health programs for the “Baby Boomers.” These are people born somewhere after World War II and until the mid of the 1960s. They are retiring in droves and many more will retire. They are in need health care, and more and more will need health care. And they all expect that the federal government will foot at least a major part of the bill.

That, as they see it, is part of the social contract they made with the federal government after decades of paying into Social Security, Medicare, etc. They feel as if they deserve it. It has really been an assumption of living in the US that it would always be there. Can you blame them? Each pay time they have been paid something has been taken out for all of this and they expect it back, plus some.

However, there is a series of problems in all of this.

According to the Concord Coalition, in 1960 there were 5.1 workers paying into Social Security for every Social Security recipient. Now there are 3.1 workers paying into Social Security for every Social Security recipient. In 2020 there will be around 2 workers paying into Social Security for every recipient. People are generally healthier, live longer, have much longer retirements, and are asking more from Social Security than ever before.

Americans are also having lesser children per family than in the 1960s. When the Social Security System was started in 1935 with the Social Security Act nobody could have guessed that such huge changes would have happened to the demographics of the US or to the lifespans and lifestyles of older people in the US. At around 1900 the lifespan of Americans was about 50 years. In 1935 when the Social Security Act was passed the average American lived to about 62 years. Now it is about 78 years on average. The Social Security System is not sustainable as it stands.

There will be Social Security cash deficit, and an increasing one, starting in just a very few years. These deficits will mount and will become rather large unless something is changed in the Social Security System. Either the retirement age is increased, the amounts given out decrease or the payroll taxes that help pay for this system are increased – and all of these are politically difficult to pass given the heated nature of this issue.

Another option is to index lifetime incomes or to index wealth at retirement and pay those who have lots of money at retirement less than those who had less money at retirement. This, of course, seems unfair to those who have been successful, but may seem fair to those who have not saved and invested for their future. It would also seem to tax foresightedness for some who have focused on their retirements. As you can see, this is a very difficult issue.

You might also see why these options and others discussed are not exactly popular with the politicians or with the lobbies for the older people in the US, like the American Association of Retired Persons (AARP). It would also not be very politically astute to inspire a million gray-haired people to protest on The Mall in front of the Congress. Some tweaking of the changes in Social Security has happened in recent years, but it could be that some changes will have to be more drastic.

Indeed, there are very difficult tradeoffs here. One of the biggest ones may turn out to be whether we want to take care of our older people or be forward leaning and very active internationally. That is Washington talk for getting into more wars and having military bases all over the world. Pretty soon the tradeoff between guns and Geritol (a multivitamin tonic for older people) will come home to roost. And this is a very serious issue at many levels.

The budget situation has become so severe that the US really needs a national discussion about where it is going in the future and what its priorities will be. That is what lack of thrift and prudence has done. Do I expect such a national dialogue to result? Only if the overall apathy of the public changes to more a proactive engagement with each other and with their leadership on these and many others issues.

The People of largest economy on earth who are some of the hardest working people on the planet have to look on with increasing stress at the budget battles on The Hill today and the possibly even more emotional and stressed out battles over where entitlements will go in the future. Does this show the proper stewardship of The People’s hard earned income and wealth?

Another aspect of all of this is the ballooning costs of medical care in the US. The huge increasing debts to accrue from Medicare and Medicaid are going to be due to the aging of the population and the fact that we have a lesser number of workers paying into federal government insurance programs in their paychecks per Medicare and Medicaid recipient in the future. The really massive debts in the future will be developed out of Medicare.

That is unless we can have the US population and the health care industry focus more on preventive health, losing weight, getting off sweets (like Saudi Arabia, Qatar and the UAE, the US has a quickly growing diabetes problem due to life styles and eating habits), which could go a long way to reduce these potential debts.

But the health care industry also has to find ways to cut costs. Part of the solution may be to have the patients feel a bit more of the pain of the costs of their medical care. Would they then make better lifestyle and health decisions? I wonder. Could you see a politician in Washington proposing this one? Part of the booming costs in medical care in the US is due to the fact that most patients do not see the costs of their medical care. It is mostly paid by third parties, such as the government via Medicare and Medicaid, or via private insurance companies, which spread the costs of having an insurance system as it exists.

The new health insurance laws and regulations passed under the present administration are quite divisive. It is still not exactly clear how these new laws and regulations will help with the debts of the future. It is a bit clearer that these new laws and regulations will likely help more people get health insurance. Tens of millions of Americans did not have health insurance prior to the passage of these. The main reason is that it was unaffordable.

Health insurance in the US outside of group plans can be very expensive, especially if someone has had or has an illness that would get the actuaries in the insurance companies pumping up the health insurance premiums. Yet, there still seems to be little incentive to reduce health insurance costs for those who go the extra mile to take care of themselves and take walks, etc. Then there are those pesky pharmaceutical, paperwork, and legal costs facing the health care industry.

Cutting back on the debts due to Medicare and Medicaid is far more complex than doing the same for Social Security. However, both are political hot potatoes that very few politicians thinking of their future would bring up as things to cut back severely or seriously rework. However, some day this needs to be done.

I don’t claim to have the answers, nor should I; the answers should come out of a real discussion nationally about what we need to do. These are tough, emotional and complex issues that affect all of us. Getting old, getting ill, and retiring are facts of life we all have to face. The big questions about how much the government should be involved and how we are going to pay for all of this will continue for years to come.

Which leaves us with a problem: if nothing is changes in these entitlements programs and the way they are run, or the way Americans eat, work, save, take care of themselves etc. stay the same then the combination of Medicare, Medicaid, and Social Security could equal all of the entire tax revenues of the country by around 2050 or thereabouts. That is if we don’t increase taxes substantially. This is another side of these complex issues.

According to the Heritage Foundation, mandatory spending, mostly represented by these entitlements increased at a pace 5 times faster than the discretionary spending, like for DOD, on average since 1970. So it is not like we don’t know there is a growing problem here.

They also show that defense expenditures have on average dropped as a percentage of GDP since 1960, yet entitlements expenditures have increased drastically. Entitlements are now 10 percent of GDP. DOD is 5 percent of GDP. Right now over ½ of the federal budget is spent on these entitlements. Yes, DOD expenditures have increased since 2001, but entitlements have grown even more.

If the experts are right on the possible trends in entitlements then they will more than double by 2050 or so. Also according to the Heritage Foundation, Medicare will be by far the fastest growing source of debt and expenditure for the federal government for years to come – unless something is done. Social Security could even level off after a while. But it will be a source of debt nonetheless, unless its system of revenue collection and entitlement expenditures are changed.

Another important point to gather from this is that if one cut out all of the discretionary expenditures (DOD, Transportation, Education, etc.) then the budget would still be in trouble due to these entitlements. As time goes on with the increase in the retirements of the “Baby Boomers” and the increase in their health costs entitlements will either fully squeeze out all discretionary expenditures or taxes will have to increase to astronomical levels.

Bottom line: the most important budgetary issues are not to be found in the discretionary parts of it, but in the mandatory parts of it. But the most difficult and sometimes the most emotional parts of any debate about the budget could be about the entitlements. So far The Hill is hardly touching on the subject of entitlements. They are dealing with the shorter term and smaller sources of debt as they try to stay away from the Himalaya of all debt sources, entitlements in the future.

The Heritage Foundation is but one supporting source for these sobering ideas. One could also look at the very good work of the Concord Coalition, a group that focuses very much on debt, deficit and future financial stresses, and they do very good work. See http://www.heritage.org/budgetchartbook/ and http://www.concordcoalition.org/. See also http://aging.senate.gov/resources.cfm and http://opencrs.com/document/RS20129/2010-12-01/

One could also look at a paper by Laurence Kotlikoff at Boston University who thinks that the US is already bankrupt given its FUTURE legal liability obligations via these entitlements:
http://research.stlouisfed.org/publications/review/06/07/Kotlikoff.pdf. See also an update:

http://www.economist.com/economics/by-invitation/guest-contributions/america_bankrupt
Some others disagree:

http://research.stlouisfed.org/publications/review/06/07/Thakor.pdf.

Here is another political triple espresso that should wake people up: http://www.usdebtclock.org/. Focus in on the $55 trillion number in the middle. The debt we usually talk about it the year to year debt or debt at a specific time. If we look at what we may owe in entitlements then that debt number, those liabilities the federal government needs to deal with in the future if nothing changes in the entitlements system is unimaginably crushing. Some think it is even much bigger than this $55 trillion.

You might want to look at this interesting document to another wake up call, as if you really needed one: http://www.kpcb.com/usainc/USA_Inc.pdf. Take a look at page ix where they show unfunded and underfunded liabilities we might be looking at. If you are brave enough try to work through the entire document and see what a mess could be really in.

Can we really be exacting to the third decimal on what we are facing? No. Are we facing a really big problem? Yes.
The House and The Senate, even with all of their efforts have not even take the first steps for dealing with the debt problems of the US. Their dysfunctional efforts have so far gotten us to the edge of the cliff, but not to the top of the mountain. And that Everest-like mountain of debt reduction is what we need to climb over the next decades.

(Professor Paul J. Sullivan teaches at Georgetown University. He can be reached at: pjs57@georgetown.edu)

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