When US Federal Reserve Chairman Alan Greenspan urged Congress last week to cut back future benefits in Social Security and Medicare, sending elected officials to the barricades, he was, if anything, understating the magnitude of the problems ahead.
Today's budget deficits are measured in the hundreds of billions of US dollars, but the looming shortfalls for the two retirement programs are projected to be in the tens of trillions of dollars.
The administration of US President George W. Bush has estimated that the gap between promises under current law and the revenues expected will total US$18 trillion over the next 75 years. But an internal study in 2002 by the Treasury Department, looking much further ahead, concluded that the gap was actually US$44 trillion -- and would climb each year that nothing was done.
ILLUSTRATION MOUNTAIN PEOPLE
The numbers are so big and extend so far into the future that they border on the surreal. Yet analysts in both Congress and the administration warn that the flood of retiring baby boomers will cause federal spending on old-age benefits to eventually consume as much of the nation's economy as the entire federal budget does now.
And while the problems would be acute even if today's federal budget were balanced, the budget deficits that seem likely for the rest of the decade make matters worse. That is because the government is borrowing more than US$200 billion a year from the Social Security and Medicare trust funds to finance its operating deficits.
In theory, the two giant trust funds are accumulating huge surpluses that can be used to pay for benefits when the baby boomers retire and the systems start taking in less than they are paying out. In practice, those surpluses are being spent, and the government will probably have to borrow huge sums of money to meet its obligations to retirees.
"It is time to start telling people the truth," said Laurence Kotlikoff, a professor of economics at Boston University and a longtime analyst of the issue.
"Suggesting that some minor adjustments to Social Security will solve the problem is doing a disservice," Kotlikoff said.
Greenspan provoked a political tempest when he told members of the House Budget Committee last week that Congress needed to trim back future Social Security and Medicare benefits to head off a fiscal calamity in decades to come.
Greenspan proposed adjustments in how the government increases benefits to keep up with inflation and suggested pushing back retirement ages to better reflect increased life expectancy.
Democrats immediately attacked the proposed cuts, saying they would be unnecessary if Bush had not been running up large annual budget deficits just before millions of baby boomers reach retirement age.
"Cutting Social Security benefits is not the way to rein in the irresponsible Bush budget deficit," said Senator Tom Daschle, the Senate Democratic leader.
Bush and Republican lawmakers distanced themselves as well, saying that much of the problem could be averted by setting up private savings accounts.
But as precarious and uncertain as long-range forecasts are, most experts agree that the combined challenges of Social Security and Medicare are too big to be addressed without politically painful remedies.
The number of retirees is expected to soar from about 40 million today to more than 76 million by 2030, meaning that fewer dollars will be coming in from payroll taxes and many more dollars will be going out in retirement and medical benefits.
The oldest baby boomers turn 65 in 2011, and by one estimate a husband and wife who retire that year are likely to collect US$700,000 in benefits before they die.
Trustees of the Medicare and Social Security funds predict the two programs will run surpluses of more than US$200 billion a year for at least the next decade. But the Medicare trust fund would start running deficits in 2013 and run out of money by 2026. Starting in 2018, the Social Security System will start paying out more than it takes in and will therefore have to dip into its trust fund. By 2044, the trust fund will be exhausted.
Most experts say the problems of Social Security are much smaller and more predictable than those of Medicare because retirement formulas are fairly simple and the cost of benefits depends primarily on demographic trends that are quite predictable.
But Medicare's condition is more ominous because medical costs have been rising much faster than the overall rate of inflation and the demand for health care is expected to soar as the baby boomers retire.
The administration estimated last year that Medicare's obligations would be more than US$10 trillion over the next 75 years. But that was before Bush signed the law that will add prescription drug benefits to Medicare, which the administration now predicts will cost US$540 billion over the next 10 years. The costs will climb rapidly after that, as the number of elderly people soars. The Congressional Budget Office has predicted that the new program could cost as much as US$2 trillion in its second decade.
Bush and many administration officials contend that much of Social Security's problems could be solved by letting people divert some of their payroll contributions to private investment accounts they might manage for themselves.
But some experts say the government would have to borrow as much as US$1 trillion over the next several decades to make up for the lost revenues and pay retirees benefits earned under the old system.
And the Congressional Budget Office, in a report on privatization plans last year, said none of the proposals would have much effect.
"Using government resources to buy stocks and bonds, without other spending and tax changes, would not automatically lead to an increase in the nation's pool of investment resources," the budget office concluded.
"There is no such thing as a free lunch," the report said.
Some experts contend that even the administration's chilling projections about the looming problems of Social Security seriously understate the problem.
In 2002, two senior economists at the Treasury Department were asked by Paul O'Neill, then the Treasury secretary, to formulate a comprehensive estimate of the federal government's long-term fiscal problems. The total, calculated by Kent Smetters, then a deputy assistant secretary for economic policy, and by Jagadessh Gokhale, an economist on loan to the Treasury from the Federal Reserve Bank of Cleveland, was an almost unthinkable US$44 trillion.
That projection was swiftly disavowed by the administration. Rob Nichols, a spokesman for the Treasury Department, said the White House had never intended to use the study in its official budget forecast.
"They were doing what they called an independent paper," he said.
Gokhale, now a senior fellow at the Cato Institute, a policy research group in Washington, recalled matters differently. "At some point, late in the game, it was decided that it wouldn't be in the budget," he said.
"In my opinion, if they had reported these numbers, they would have gotten a lot of credit," Gokhale said.
Kotlikoff has devised a "menu of pain" to lay out different ways of bridging the gap. The choices range from an immediate increase in federal income taxes of 69 percent to an immediate cut in Social Security and Medicare benefits of 45 percent.
And those numbers may be too low, he said, because even the disavowed Treasury estimate for the shortfall may be too low. When the new prescription drug program is added, he said, the imbalance is closer to US$51 trillion.
Whether one accepts the administration's forecast or that of the disavowed study, everyone agrees that the potential problems with Social Security and Medicare dwarf the short-term problems of balancing the budget.
"The issue is entitlements," said Gregory Mankiw, chairman of the White House Council of Economic Advisers.
"That is a huge challenge, but it would be a challenge even if we had a balanced budget today," Mankiw said.
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