Will Entitilements do us in?

“I finally saw the light at the end of the tunnel, but it turned out to be the headlight of an oncoming train.” I don’t know who first made this darkly humorous statement, but I find it an apt description of our current economic situation.

There are those who do see the light at the end of the tunnel. Newsweek Magazine recently declared “America Is Back” on the cover of its April 19th issue. Indeed, there are positive signs. The Dow Jones industrial average has risen nearly 70% in the past 13 months. Auto sales were up 16% for the first quarter of 2010. GDP growth is projected to be 3.6% for the year, a respectable increase. 162,000 new jobs were created in March. All good news – but then there’s that approaching train I like to call the Entitlement Express.

Our nearly 13 trillion dollar national debt is just the tip of the iceberg. That is current debt. What is truly frightening is the size of future obligations. Our government has promised trillions more in the form of Social Security and Medicare payments, federal pensions, and retiree health care in the coming decades. Since the money is not going to be there to fulfill these promises, they are often called “unfunded obligations” or liabilities. Including these promised pay-outs makes our real debt more like 107 TRILLION dollars! That is about seven times the size of the entire US economy.

Now we could easily knock this thing out if every man, woman, and child who is an American citizen would just donate $200,000 to the government. (ha-ha) Unfortunately, real solutions involve making difficult choices and will require sacrifice on the part of all of us.

Social Security and Medicare are known as entitlements because American citizens have had taxes deducted from their paychecks to pay for these programs and are therefore entitled to a return on their “investment” when they reach the age of 65. (It should be noted that, according to a 1960 Supreme Court ruling, we are not legally entitled to that money.) The spending for these programs is also called “mandated” spending because Congress has passed laws requiring the government to make these pay-outs according to predetermined formulas. This spending is not up for debate when Congress passes its yearly budget.

Currently, there is a surplus in the social security trust fund. But that surplus is not in the form of cash! The law dictates that any surplus must be invested in US treasury bonds. Remember, if you or I or even the Social Security trust fund buys US treasury bonds, we are lending our money to the government in expectation of getting that money back plus interest. In other words, the social security trust fund has been loaned to the government to fund present spending in other areas. Of course, those treasury bonds are considered very safe assets. They will be repaid to the social security fund when needed. However, the government will have to find the money to do that by either raising taxes, cutting spending for other needs, or more borrowing, adding even more to the ever-growing debt.
When will that happen? The program is projected to begin cashing in those bonds in 2016, just six years from now. The surplus will run out by 2037. At that time, social security payroll taxes will provide only 75% of promised benefits.

As bad as the social security situation is, Medicare is in even worse shape. It is already drawing down its trust funds and costs are expected to rise exponentially as medical costs increase and the population ages. With Social Security, at least we know how to fix it, even if our political leaders don’t have the will to do so. But no one really knows how to fix Medicare.

Well, that’s not exactly true. We don’t seem to know how to reduce medical costs, but the Social Security and Medicare Boards of Trustees reports that Medicare can be brought into balance over the next 75 years IF we either increase the payroll tax by 134% immediately, or make an immediate 53% reduction in pay-outs. Imagine running for office by promising either of those solutions!

Most experts agree that our current economic situation is unsustainable. Fixing it will require either tax increases or cuts in spending or a combination of both. Since we, the people, refuse to support anyone who tells us they are willing to try either of those alternatives, it is unlikely that we will see any significant changes until a major crisis leaves us no other choice.