September 29, 2008
By Brian M. Riedl
Think $700 billion to bail out Wall Street is expensive? Just
wait. The mortgage meltdown is cheap compared with the coming
fiscal firestorm fanned by unfunded Social Security and Medicare
Together, these programs hold unfunded obligations totaling $41
trillion - 60 times larger than the proposed Wall Street bailout.
And even this understates the difference, because $41 trillion is
the current net value of the unfunded obligations over 75 years.
The actual cumulative yearly deficits these programs face over the
next 75 years are several magnitudes larger than $41 trillion.
Imagine a taxpayer bailout even larger than what's proposed for
Wall Street. Now imagine it recurring every year in perpetuity.
That's our fiscal future unless we fundamentally reform these
unsustainable entitlement programs.
Certainly, there are some differences between the two
situations. Unlike entitlement spending, the Wall Street bailout
would actually give the government assets it could later sell to
recoup much of the costs. On the other hand, by issuing federal
debt, the Wall Street bailout would add to the government's
explicit obligations - unlike Social Security and Medicare's
implicit obligations that, legally, could be cut anytime by
The entitlement problem is simple to understand. In the 1960s,
five workers paid the taxes for each retiree's Social Security and
Medicare benefits. Today that ratio is just 3-to-1. The coming
retirement of 77 million Baby Boomers will drive that ratio down to
2-to-1 by 2030. That means every two children born this year and
who marry in 2030 will have to support themselves, their children -
and the Social Security and Medicare benefits of their very own
retiree. The cost will be staggering.
While both programs face rising costs due to demographics, the
added problem of steeply rising health care costs puts Medicare in
even worse shape than Social Security.
Absent reform, paying all promised retiree benefits would
require either: A) doubling all tax rates; B) eliminating every
other federal program, including defense and education; or C)
running massive budget deficits that would eventually collapse the
economy. And every year of delay raises the final cost of reform by
trillions of dollars.
Yet delay is all we get from Congress. Lawmakers know these
program costs are completely unsustainable, but they see reform as
expensive and politically risky. And so, they kick the can down the
road, putting the future stability of our entire economy at
The impending retirement of 77 million Baby Boomers is not
theoretical. It can't be dismissed or wished away. And when the
inevitable Social Security and Medicare costs come, taxpayers will
demand to know why lawmakers ignored the warnings.
They will discover that in January 2008, Moody's warned that the
United States' triple-A credit rating would be reduced within a
decade unless Congress reformed these programs.
And Congress just shrugged.
Shortly thereafter, the Medicare trustees warned that payroll
taxes and user premiums will soon cover barely half of the
program's cost, forcing a record 45 percent of its budget to be
subsidized out of general tax revenues. Even though the warning
triggered a law requiring an examination of Medicare reforms,
Congress again just shrugged.
Next, the Congressional Budget Office projected a 2008 federal
budget deficit of $407 billion, driven mostly by escalating Social
Security, Medicare and Medicaid costs. The data showed that these
three programs - comprising nearly half of federal spending - are
set to push the deficit to nearly $1 trillion over the next decade,
and higher thereafter.
Again, Congress just shrugged. And when a bipartisan group of
lawmakers in the House and Senate offered legislation to create a
commission to fix these programs before they bankrupt the nation,
congressional leadership refused to allow a vote on it.
Every day that Congress wastes naming post offices and
allocating pork projects is a day that the Baby Boomers move closer
to retirement, and the eventual costs of an entitlement bailout
Reform will take time, but lawmakers can begin by publicly
disclosing the unfunded obligations of Social Security and Medicare
in the federal budget. They can also take these programs off
autopilot and place them on a long-term budget.
Today we are grappling with a very real financial crisis. While
we cannot go back in time and fix it, we can start acting now to
prevent the next, clearly visible crisis. It promises to be 60
times bigger than the Wall Street debacle. Is Congress paying
Riedl is the Grover M. Hermann Fellow in Federal
Budgetary Affairs, in the Thomas A. Roe Institute for Economic
Policy Studies at the Heritage Foundation.
First Appeared in San Francisco Chronicle
Think $700 billion to bail out Wall Street is expensive? Just wait. The mortgage meltdown is cheap compared with the coming fiscal firestorm fanned by unfunded Social Security and Medicare costs.
Brian M. Riedl
Grover Hermann Fellow in Federal Budgetary Affairs
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