We all know that the retirement and health care demands of the 76 million Baby Boomers will put unprecedented strain on the already deficit-ridden federal budget, beginning about 2008 and growing for many decades. We also know that we have become dangerously dependent on foreign lenders to finance both our government's profligacy and the yawning gap between what the American people consume and what we produce.
It is nonetheless staggering to soak in the sheer magnitude of these problems, and scary to see how the seemingly distant danger of fiscal meltdown could trigger a crisis on any given day. All of this is explained in Running on Empty, the latest of a succession of compelling jeremiads by Peter G. Peterson, an old-fashioned Republican who was Commerce secretary during the Nixon administration. The question that lingers at the book's end is whether America's politicians and voters will emerge from the head-in-the-sand denial exemplified by the current presidential campaign in time to avoid fiscal and economic self-destruction.
Absent fundamental reforms, the combined cash-flow deficit of Medicare and Social Security -- now a modest $25 billion or so -- will increase more than twentyfold by 2020, to $519 billion per year in today's dollars, according to the government's own projections. It will reach $1.6 trillion by 2040. Meanwhile, economists at the Brookings Institution and the University of California (Berkeley) estimate that by 2040, the annual budget deficit will soar from the $445 billion, or 3.8 percent of gross domestic product, projected by the White House for this fiscal year, to a disastrous 20 percent of GDP, with interest payments on the accumulated national debt rising from the current 1.4 percent to 11.9 percent of GDP.
A more immediate danger is our accumulated net debt to the rest of the world -- now $2.6 trillion, up from zero in 1980 and rising by an annual current-account deficit that has reached $540 billion, an unprecedented 5 percent of GDP. These numbers dramatize the risk of a global economic crisis if -- when? -- the world's investors lose confidence in America's ability to pay its debts, both external and internal.
That could spur a flight from the dollar, a spike in interest rates, a stock market plunge, a global recession -- and perhaps worse. Paul Volcker, the former Federal Reserve Board chairman, has put the odds of a crisis at 75 percent within five years, Peterson reports. And the International Monetary Fund, evincing concern that the United States is acting like a banana republic, has warned that it would take "an immediate and permanent 60 percent hike in the federal income-tax yield, or a 50 percent cut in Social Security and Medicare benefits" to finance the government's promises to future retirees.
What plans have our presidential candidates announced to avert the fiscal disaster that seems inevitable unless we stop slashing taxes and start containing the runaway costs of Medicare and Social Security? Precious few.
Both President Bush and John Kerry claim that they will cut the budget deficit in half by 2009. But their economic assumptions are wildly unrealistic. In fact, some deficit hawks say that the programs and tax cuts proposed by Bush and Kerry alike would add more than $1 trillion to the budget deficit over the next decade. (See "The Nonissue," NJ, 7/17/04, p. 2240.) Neither Bush nor Kerry has a viable plan for returning to budget surpluses, ever. And neither has come to grips with the impossibility of paying the Medicare and Social Security benefits promised by current law to the Baby Boomers. Driven by an aging population and medical cost inflation, these old-age entitlements are projected to soar from the current 7 percent of GDP to a ruinous 14 percent by 2034.
Bush would dig us deeper into this fiscal hole by making permanent the "inequitable and profligate tax cuts" (in Peterson's words) that he has already pushed through, and by adding still more. This despite the fact that federal taxes are at their lowest point in a half-century as a percentage of the economy. And despite the unprecedented swing from the Congressional Budget Office's 2001 forecast of $5.6 trillion in budget surpluses over the next decade to the current forecast of deficits totaling between $2.7 trillion and $6 trillion over the coming decade. The Bush tax cuts account for about one-third of this fiscal deterioration.
Bush has also thrown spending restraint to the winds. The Medicare prescription drug benefit that he pushed through Congress will cost $535 billion over the next 10 years -- an estimate that administration officials suppressed while Congress barely passed what was advertised as a $400 billion program. And thereafter, the cost will explode. Bush has also presided over real spending increases averaging 7 percent in each of the past three years, including billions in pork, with nary a veto. And while Bush claims that he is now ready to clamp down on spending, his track record inspires no confidence.
Bush's vague plan to reform Social Security by diverting some payroll taxes into private investment accounts may be worth a try. But his suggestion that this would finance all benefits promised by current law, with no tax increase, is ludicrous. Indeed, Bush has ignored the enormous cost of using the payroll tax, which funds current retirees' monthly checks, to fund future retirees' investment accounts at the same time. As for Medicare reform, Bush's main proposal -- attaching incentives to his prescription drug bill to entice seniors to join competing private health plans -- got nowhere in the Republican Congress.
Kerry pledges to repeal the Bush tax cuts for people with incomes above $200,000 and to reinstate the 1990s pay-as-you-go federal budget rules that expired in 2002. So far, so good. But Kerry supports most of Bush's tax cuts. And the spending and tax credits that Kerry has pledged to finance new programs, including his $653 billion health care plan, would more than eat up his new tax-the-rich revenues.
As for Social Security and Medicare, Kerry and his fellow Democrats have little to say that's serious, and they have demonstrated their readiness to launch demagogic attacks on any Republican who mentions the manifest need to curb these old-age entitlements. Kerry has suggested raising the payroll taxes of "high-income" workers. But he has recklessly ruled out raising the retirement age, which would save far more money.
How did we reach this bipartisan consensus for bigger government with lower taxes, rising deficits, and -- eventually -- fiscal suicide? The two parties, which used to temper one another's fiscal vices, now mimic them. Republicans, for whom tax-cutting has become almost a religion, now vie with Democrats in using new spending programs to chase votes. And Democrats, longtime champions of deficit spending without end, now seek to match Republicans in proposing middle-class tax cuts. Contrary to forecasts by Republicans of the "starve-the-beast" school, big deficits have not forced cuts in pet Democratic programs. Rather, they have fostered a reckless game of deficit-chicken.
Republicans may take comfort from Peterson's demonstration that the expansion of old-age entitlements required by current law will do far more long-term fiscal damage than the Bush tax cuts will. But, in Peterson's words, "this administration and the Republican Congress have presided over the biggest, most reckless deterioration of America's finances in history," and are behaving like "the party of imperial bread and circuses."
This at a time when the United States (like other developed nations) faces a long-term economic challenge without historical precedent: We are living longer and having fewer babies than ever before. As a result, while 3.3 working people now share the burden of paying for each retiree's Social Security checks and health care, by 2030 that burden -- plus far greater health care costs per retiree -- will be shared by only 2.2 workers.
This challenge can be met if the economy grows, if we raise tax rates closer to where they were during the economic boom of the 1990s, and if we adopt reforms such as Peterson's suggestion that we -- like Britain's Margaret Thatcher -- index Social Security benefits not to increases in average salaries, as current law requires, but to the cost of living, which rises more slowly. More drastic reforms will be necessary to prevent a Medicare meltdown.
But the public pressure for fiscal sanity that forced politicians to bring deficits under control in the late 1980s and 1990s is nowhere in evidence now. Until that changes, we will get the politicians we deserve. And we will have an economy at risk of crashing any day and almost certain to impose crushing burdens on our children.