the sky is falling
Oct. 12th, 2004 05:06 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
raganiNot to sound like Chicken Little, but here are some articles that my mom sent me in her campaign to help her children prepare for the pending depression. These either cost to view online or I don't know where to find them, so I put them behind cuts for your pleasure.
AMERICA'S ADDICTION TO ASIAN CREDIT
By The Texas Hedge
Todd Stein & Steven McIntyre
October 8, 2004
texashedge.com
"Now, how do they pay for that deficit? They have to go borrow money. Most of it they borrow from the Chinese and the Japanese government. Sure, these countries are competing with us for good jobs, but how can we enforce our trade laws against our bankers? I mean, come on." -
Bill Clinton at the 2004 Democratic National Convention
This quote by former President Bill Clinton was perhaps his most important quote in several years, yet the media didn't give it much attention. While Clinton's intentions were no doubt entirely political, it is worth some time to give a little thought to the growing purchases of US Dollars by Asian central banks.
Asian central banks have been financing America's $500 billion current account deficit mostly via the purchasing of US Treasuries. To get a better grip on this number, try to understand that America needs $1 million of Asian capital every minute in order to maintain its current standard of living. Asia presently holds over $2 trillion in foreign exchange reserves and shows no sign of reversing this trend.
While it is not news that Asia's reserves continue to increase, it is worth nothing that Japan, China, South Korea and other countries have started to reassess their appetite for US Treasuries. Some Asian finance ministers have spoken out openly about diversifying out of dollars and plowing reserves into alternatives such as gold and euros. As the dollar has fallen to record lows against several currencies, more international scrutiny has been applied to how the United States would fund its fiscal and current account deficits without Asian credit. If America doesn't decrease its dependence on foreign capital, the dollar could weaken further, forcing the Federal Reserve to choose between (1) protecting its currency by raising interest rates and choking off economic growth or (2) continue debasing the dollar which could potentially result in hyperinflation.
Unfortunately, American businesses, consumers and governmental organizations show no signs of reducing their addiction to foreign capital. Eventually, however, the pace of dollars pouring into Asian coffers will slow or, even scarier, reverse. And with a global dollar glut becoming reality, it will take an increasing amount of currency to purchase the same goods and services. When this happens, we expect to see rising prices at Wal-Mart stores, gas stations and grocery stores as tanker loads of dollars end up back on our shores.
The fact is that Japan and China have America by the throat economically - although a dollar crisis here will have adverse effects everywhere. While America's military power is undisputed, there have been signs of China flexing its economic might in order to contain the United States militarily. Our government's stance on Taiwan, for example, has changed significantly in China's favor over the last decade. It was only eight years ago when the U.S. responded to Chinese missile threats by sending warships to the Taiwan Strait, in what would become the largest show of naval force since the Vietnam War. It will be interesting to see what America's reaction will be to Chinese aggression in the future as its leaders have clearly stated that Taiwan is next in line for reunification. During the past few years, reports have surfaced that China has deployed hundreds of short-range ballistic missiles opposite Taiwan. According to the Asia Times, Pentagon officials told Taiwan that by next year, China might be able to deter US counterattacks as "China is adding not only 75 short-range missiles against Taiwan each year but also an inventory of amphibious carriers and light tanks, cruise missiles, unmanned aerial vehicles, and a network of surveillance satellites."
So while President Clinton points out America's inability to enforce its trade laws against its creditors, we suggest readers read the military and monetary tealeaves as well. If tensions arise with Japan or China, then we expect to see massive dollar selling as a result.
September 27, 2004
Todd Stein & Steven McIntyre
Texas Hedge Report
Todd Stein & Steven McIntyre are internationally known analysts and editors of The Texas Hedge Report, a market newsletter that highlights under and overvalued securities in the equity, bond, currency, and commodity markets
---------------- For more information, go to http://www.texashedge.com -----------------
By Dennis Cauchon and John Waggoner, USA TODAY
The long-term economic health of the United States is threatened by $53 trillion in government debts and liabilities that start to come due in four years when baby boomers begin to retire. (Related graphic: U.S. economy threatened by aging of America)
The "Greatest Generation" and its baby-boom children have promised themselves benefits unprecedented in size and scope. Many leading economists say that even the world's most prosperous economy cannot fulfill these promises without a crushing increase in taxes — and perhaps not even then.
Neither President Bush nor John Kerry is addressing the issue in detail as they campaign for the White House.
A USA TODAY analysis found that the nation's hidden debt — Americans' obligation today as taxpayers — is more than five times the $9.5 trillion they owe on mortgages, car loans, credit cards and other personal debt.
This hidden debt equals $473,456 per household, dwarfing the $84,454 each household owes in personal debt.
The $53 trillion is what federal, state and local governments need immediately — stashed away, earning interest, beyond the $3 trillion in taxes collected last year — to repay debts and honor future benefits promised under Medicare, Social Security and government pensions. And like an unpaid credit card balance accumulating interest, the problem grows by more than $1 trillion every year that action to pay down the debt is delayed.
"As a nation, we may have already made promises to coming generations of retirees that we will be unable to fulfill," Federal Reserve Chairman Alan Greenspan told the House Budget Committee last month. (Related story: Americans' views on the benefit quandary)
Greenspan and economists from both political parties warn that the nation's economy is at risk from these fast-approaching costs. If action isn't taken soon — when baby boomers are still working and contributing payroll taxes— the consequences may be catastrophic, some economists say.
The worst-case scenario is a sudden crisis — perhaps a major terrorist attack or a shutoff of oil from the Middle East — that triggers a loss of confidence by investors in the U.S. economy. Foreign investors refuse to lend more money to the government to finance its deficits; drastic tax increases and benefit cuts occur suddenly; the dollar's value plummets, which raises the cost of imported goods; and a severe recession or depression results from falling incomes.
A softer landing: The USA acts swiftly and becomes more like Europe. Taxes are higher, retirement benefits are less generous but widely distributed; health care costs are controlled; and the economy is sound but less productive.
Big payments on the debt start coming due in 2008, when the first of 78 million baby boomers — the generation born from 1946 to 1964 —qualify at age 62 for early retirement benefits from Social Security. The costs start mushrooming in 2011, when the first boomers turn 65 and qualify for taxpayer-funded Medicare.
Early warning signs
But Americans needn't wait until 2008 or 2011 to see firsthand the escalating costs of these benefit programs. Medicare last month announced the largest premium increase in the program's 39-year history. In 2004 alone, federal spending on Medicare and Social Security will increase $45 billion, to $789 billion. That one-year
increase is more than the $28 billion budget of the Department of Homeland Security.
Many economists say a failure to confront the nation's debt promptly will only delay the inevitable.
"The baby boomers and the Greatest Generation are delivering an economic disaster to their children," says Laurence Kotlikoff, a Boston University economist and co-author of The Coming Generational Storm, a book about the national debt. "We should be ashamed of ourselves."
USA TODAY used official government numbers to compute what the burden means to the average American household. To pay the obligations of federal, state and local government:
•All federal taxes would have to double immediately and permanently. A household earning $100,000 a year would see its federal taxes double from an average of about $20,000 to $40,000 a year. All state taxes would have to increase 20% immediately and permanently.
•Or, benefits for Social Security, Medicare and government pensions
would have to be slashed in half immediately and permanently. Social Security checks would be cut from an average of $1,500 per month for couples to $750. Military pensions would drop from an average of $1,782 per month to $891. Medicare spending would fall from $7,500 to $3,750 annually per senior. The Medicare prescription-drug benefit enacted last year would be canceled.
•Or, a combination of tax hikes and benefit cuts — such as a 50% increase in taxes and a 25% reduction in benefits — would avoid the extremes but still require painful changes that are outside the scope of today's political debate. Savings also could come in the form of price controls on prescription drugs, raising retirement ages and limiting benefits to the affluent.
Every solution has the potential to damage the economy by reducing disposable income or diverting economic resources.
The estimates computed by USA TODAY are similar to ones by government watchdog agencies such as the Congressional Budget Office and the Government Accountability Office and respected think tanks such as the conservative American Enterprise Institute, the liberal Brookings Institution and the non-partisan Urban Institute.
"Political leaders know this is a big problem," says Glenn Hubbard, chairman of the Council of Economic Advisers for President Bush from 2001 to 2003. "I know the president is keenly aware. But in an election year, it's not easy to talk about. The solutions may be very painful. If he is re-elected, I think he will make this a top priority next year. I hope so."
"Economists agree this cannot go on," says Joseph Stiglitz, President Clinton's chief economic adviser from 1995 to 1997. "We can borrow and borrow, but eventually there will be a day of reckoning."
Economist James Galbraith of the University of Texas in Austin is a rare optimist in this debate. "I'm not at all concerned about Medicare or Social Security," Galbraith says. "Unless the government goes broke, Medicare isn't going to go broke, and the U.S. government isn't going to go broke because it can print money."
Galbraith says the country can handle higher tax rates, as Europeans do, and can save money by cutting spending elsewhere, such as on defense, and by implementing a Canadian-style health care system that uses private doctors and hospitals but has the government set prices and pay the bills.
"We are an enormously rich country," he says. "Providing health care and a modest living for our elderly is certainly something we can afford."
An aging population
Social Security was created in 1935 to help the elderly avoid poverty during the Great Depression. Medicare was established in 1965 to provide health care for the elderly, who were finding it increasingly difficult to afford medical care. But the aging of America and a declining birth rate have put these programs on a collision course with financial reality.
When the government set 65 as the retirement age in the 1930s, most people didn't live that long. But life expectancy for women has increased from 66 to 80 since 1940 and for men from 61 to 75.
Meanwhile, the birth rate has dropped from 25 births per 1,000 residents in the 1950s to just 15 today. The lower birth rate ultimately means fewer workers paying taxes to finance Social Security and Medicare benefits for the rapidly growing population of people 65 and over.
Medicare has had about 3.3 workers paying taxes for every recipient for the past 30 years. Baby boomer retirements will reduce that to just two workers supporting every Medicare recipient in 2040.
Immigration has helped offset some of the decline in birth rates. But immigration rates would have to increase by five or 10 times — above the recent peak of 1.2 million in 2001, legal and illegal — to provide enough workers and their payroll taxes to boost Medicare.
Medicare recipients are growing older and more expensive, too. Annual medical costs for an 85-year-old are double those of a 65-year-old. Federal spending per Medicare recipient will average $7,500 this year. The official projection for 2050: $26,683 per recipient in 2004 dollars.
A problem in plain view
The scope of the problem is no secret in Washington.
Medicare and Social Security trustees report the obvious every year: The system has no way to pay for itself, even under the rosiest scenarios. The Congressional Budget Office regularly updates Congress on the liabilities.
Bush's budget for the fiscal year that began Friday spells out the numbers in detail and concludes, "These long-term budget projections show clearly that the budget is on an unsustainable path."
Comptroller General David Walker, the government's chief accountant, travels the nation warning of the impending crisis. "I am desperately trying to get people to understand the significance of this for our country, our children, our grandchildren," Walker says. "How this is resolved could affect not only our economic security but our national security. We're heading to a future where we'll have to double federal taxes or cut federal spending by 50%."
But documentation of the problem hasn't prompted political action to address it. The $4.2 trillion national debt has generated some debate in Congress and the presidential campaign. But the government's obligations for Medicare and Social Security are 10 times the size of the national debt.
"We have instructed our politicians not to tell us about this problem," says Boston University economist Kotlikoff. "If they even mention cuts to Social Security, we vote them out of office."
Grim financial statement
To bring attention to the problem, USA TODAY prepared a consolidated financial statement for taxpayers, similar to what corporations give shareholders. The newspaper totaled federal, state and local government liabilities, taken from official documents.
Key findings:
•Total hidden debt. Federal, state and local governments today have debts and "unfunded liabilities" of $53 trillion, or $473,456 per household. An unfunded liability is the difference, valued in today's dollars, between what current law requires the government to pay and what current law provides in projected tax revenue.
•Social Security. The retirement program has $12.7 trillion in obligations it cannot meet for current workers and retirees at the current Social Security tax rate.
•Medicare. The health care program has a $30 trillion unfunded liability for people now in the system as workers or beneficiaries. The $30 trillion reflects the value today of the more than $200 trillion in deficits over 75 years to cover current workers and retirees at existing levels of benefits, tax rates and premiums. Medicare's new prescription-drug benefit, which starts in 2006, accounts for $6.9 trillion of the program's financial ill health.
How much is $30 trillion? The gross domestic product, the entire economic output of the USA, was $11 trillion last year.
"These numbers are staggering in their magnitude," says economist Thomas Saving, whom Bush appointed as a public trustee on the Medicare and Social Security board. "But when I testify before Congress, I'm the only one saying, 'We have a funding problem.' Everyone else is testifying for more benefits."
Like a home mortgage
The $53 trillion in liabilities is like a mortgage balance: That's what it would cost to pay off the debt now. The actual cost would be higher because of interest payments. A $100,000 mortgage at 5% interest, for example, actually requires $193,000 in income to repay over 30 years.
Under corporate accounting rules, a corporation would record a $100,000 liability on its books if it promised to pay $193,000 in medical benefits over 30 years. That liability would reduce profits immediately, when the promise was made, although the money would be paid over 30 years. Otherwise, shareholders could be fooled into thinking that the company was better off than it really was.
In fact, the company had committed $193,000 in future revenue — worth $100,000 today — to a retiree and couldn't use the money for shareholder profits.
Government doesn't follow this accounting rule. If it did, the federal deficit in 2004 would be $8 trillion, not $422 billion. The $8 trillion reflects the value of new financial obligations Congress approved without any way to pay for them,plus the year's operating deficit.
Government accounting rules are more lenient because, unlike a business, Congress can take whatever money it needs through taxes and renege on promises by passing new laws. Theoretically, the president and Congress could end all health care for the elderly tomorrow and cease Social Security payments the next day — or double or triple tax rates to pay the bills.
That's why AARP, a non-partisan lobbying group for people over 50, says the unfunded promises of Medicare and Social Security are less worrisome than they appear.
"The reason we make companies fund their pension liabilities is because it's uncertain they'll be around in the future. That doesn't apply to government," says John Rother, AARP's research director. "The size of the liabilities isn't relevant, nor is how much we put aside today. What matters is how healthy will the economy be in the future."
He agrees that Medicare has a long-term funding problem but says the nation's entire health system is the issue, not Medicare.
Alan Auerbach, director of the Burch Center for Tax Policy and Public Finance at the University of California-Berkeley, says people are understandably skeptical about gloomy predictions. But he says these numbers are not guesses.
"We can't predict major wars or major inventions," he says. "But we do know the baby boomers aren't going to disappear. We know pretty well that health care costs will rise because of new technology. I wish these were worst-case scenarios, but they're rather cautious best guesses. It could be much worse."
A bill coming due
The heart of the problem is that the Greatest Generation and baby boomers have promised themselves retirement benefits so generous — and have contributed so little to financing them — that even the most prosperous economy in history cannot pay the bill.
Consider a married couple who throughout their lives earned the median income — the amount at which half of Americans make more and half make less — and who will retire at age 65 next year. They earned $46,400 in their final year of work.
Mr. and Mrs. Median would get a joint Medicare benefit valued at $283,500, the Urban Institute estimates. That's the present value of the benefit — what it's worth today — not the larger amount the government will actually pay over the years. But the couple would have paid only $43,300 in Medicare taxes (valued in 2004 dollars). Taxpayers lose $240,200 on the deal.
But the Medians' good fortune doesn't end there. They also qualify for $22,900 in annual Social Security benefits, which rise annually with inflation.
Present value of the Social Security benefit: $326,000. Present value of Social Security taxes paid over a lifetime: $198,000.
Net loss to taxpayers: $128,000.
And the situation is worse than that. The federal government didn't save the money that the Medians paid in Medicare and Social Security taxes. It spent that money as it came in on other things — defense, education, past Medicare costs, etc. So the Social Security and Medicare taxes paid by Mr. and Mrs. Median won't help offset the cost of their benefits. The Social Security and Medicare trust funds have no money, only IOUs that other taxpayers must repay.
"These mythical trust funds are a financial oxymoron — they can't be trusted and they aren't funded," says Peter Peterson, a businessman and Commerce secretary under President Nixon who wrote the best seller Running on Empty: How the Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It.
Because the trust funds have been spent, taxpayers must come up with the full $609,500 that Mr. and Mrs. Median are entitled to under Medicare and Social Security. And the Medians are a bargain compared with what their 45-year-old children will cost.
Social Security is structured so that future generations get increasingly large benefits. And Medicare benefits rise with soaring health care costs.
The Medians' children would receive Social Security and Medicare benefits with a present value of $884,000 in 2004 dollars when they turn 65, according to the Urban Institute. That's 45% more than their parents would get.
For Hubbard, now dean of the Columbia Business School in New York, the stakes are clear: "The question is whether the political process will make gradual changes or we'll wait for a crisis."
Contributing: Paul Overberg, Bruce Rosenstein
All part of her argument that I should start putting my money into something more stable, like gold (apparently my aunt has a gold bar as her nest egg). I asked her what else people have been putting their money into, and she said that, in the past, items like bullets and alcohol have worked for some. What other items do you think could weather the drop of the dollar enough to become a commodity for trade?
AMERICA'S ADDICTION TO ASIAN CREDIT
By The Texas Hedge
Todd Stein & Steven McIntyre
October 8, 2004
texashedge.com
"Now, how do they pay for that deficit? They have to go borrow money. Most of it they borrow from the Chinese and the Japanese government. Sure, these countries are competing with us for good jobs, but how can we enforce our trade laws against our bankers? I mean, come on." -
Bill Clinton at the 2004 Democratic National Convention
This quote by former President Bill Clinton was perhaps his most important quote in several years, yet the media didn't give it much attention. While Clinton's intentions were no doubt entirely political, it is worth some time to give a little thought to the growing purchases of US Dollars by Asian central banks.
Asian central banks have been financing America's $500 billion current account deficit mostly via the purchasing of US Treasuries. To get a better grip on this number, try to understand that America needs $1 million of Asian capital every minute in order to maintain its current standard of living. Asia presently holds over $2 trillion in foreign exchange reserves and shows no sign of reversing this trend.
While it is not news that Asia's reserves continue to increase, it is worth nothing that Japan, China, South Korea and other countries have started to reassess their appetite for US Treasuries. Some Asian finance ministers have spoken out openly about diversifying out of dollars and plowing reserves into alternatives such as gold and euros. As the dollar has fallen to record lows against several currencies, more international scrutiny has been applied to how the United States would fund its fiscal and current account deficits without Asian credit. If America doesn't decrease its dependence on foreign capital, the dollar could weaken further, forcing the Federal Reserve to choose between (1) protecting its currency by raising interest rates and choking off economic growth or (2) continue debasing the dollar which could potentially result in hyperinflation.
Unfortunately, American businesses, consumers and governmental organizations show no signs of reducing their addiction to foreign capital. Eventually, however, the pace of dollars pouring into Asian coffers will slow or, even scarier, reverse. And with a global dollar glut becoming reality, it will take an increasing amount of currency to purchase the same goods and services. When this happens, we expect to see rising prices at Wal-Mart stores, gas stations and grocery stores as tanker loads of dollars end up back on our shores.
The fact is that Japan and China have America by the throat economically - although a dollar crisis here will have adverse effects everywhere. While America's military power is undisputed, there have been signs of China flexing its economic might in order to contain the United States militarily. Our government's stance on Taiwan, for example, has changed significantly in China's favor over the last decade. It was only eight years ago when the U.S. responded to Chinese missile threats by sending warships to the Taiwan Strait, in what would become the largest show of naval force since the Vietnam War. It will be interesting to see what America's reaction will be to Chinese aggression in the future as its leaders have clearly stated that Taiwan is next in line for reunification. During the past few years, reports have surfaced that China has deployed hundreds of short-range ballistic missiles opposite Taiwan. According to the Asia Times, Pentagon officials told Taiwan that by next year, China might be able to deter US counterattacks as "China is adding not only 75 short-range missiles against Taiwan each year but also an inventory of amphibious carriers and light tanks, cruise missiles, unmanned aerial vehicles, and a network of surveillance satellites."
So while President Clinton points out America's inability to enforce its trade laws against its creditors, we suggest readers read the military and monetary tealeaves as well. If tensions arise with Japan or China, then we expect to see massive dollar selling as a result.
September 27, 2004
Todd Stein & Steven McIntyre
Texas Hedge Report
Todd Stein & Steven McIntyre are internationally known analysts and editors of The Texas Hedge Report, a market newsletter that highlights under and overvalued securities in the equity, bond, currency, and commodity markets
---------------- For more information, go to http://www.texashedge.com -----------------
By Dennis Cauchon and John Waggoner, USA TODAY
The long-term economic health of the United States is threatened by $53 trillion in government debts and liabilities that start to come due in four years when baby boomers begin to retire. (Related graphic: U.S. economy threatened by aging of America)
The "Greatest Generation" and its baby-boom children have promised themselves benefits unprecedented in size and scope. Many leading economists say that even the world's most prosperous economy cannot fulfill these promises without a crushing increase in taxes — and perhaps not even then.
Neither President Bush nor John Kerry is addressing the issue in detail as they campaign for the White House.
A USA TODAY analysis found that the nation's hidden debt — Americans' obligation today as taxpayers — is more than five times the $9.5 trillion they owe on mortgages, car loans, credit cards and other personal debt.
This hidden debt equals $473,456 per household, dwarfing the $84,454 each household owes in personal debt.
The $53 trillion is what federal, state and local governments need immediately — stashed away, earning interest, beyond the $3 trillion in taxes collected last year — to repay debts and honor future benefits promised under Medicare, Social Security and government pensions. And like an unpaid credit card balance accumulating interest, the problem grows by more than $1 trillion every year that action to pay down the debt is delayed.
"As a nation, we may have already made promises to coming generations of retirees that we will be unable to fulfill," Federal Reserve Chairman Alan Greenspan told the House Budget Committee last month. (Related story: Americans' views on the benefit quandary)
Greenspan and economists from both political parties warn that the nation's economy is at risk from these fast-approaching costs. If action isn't taken soon — when baby boomers are still working and contributing payroll taxes— the consequences may be catastrophic, some economists say.
The worst-case scenario is a sudden crisis — perhaps a major terrorist attack or a shutoff of oil from the Middle East — that triggers a loss of confidence by investors in the U.S. economy. Foreign investors refuse to lend more money to the government to finance its deficits; drastic tax increases and benefit cuts occur suddenly; the dollar's value plummets, which raises the cost of imported goods; and a severe recession or depression results from falling incomes.
A softer landing: The USA acts swiftly and becomes more like Europe. Taxes are higher, retirement benefits are less generous but widely distributed; health care costs are controlled; and the economy is sound but less productive.
Big payments on the debt start coming due in 2008, when the first of 78 million baby boomers — the generation born from 1946 to 1964 —qualify at age 62 for early retirement benefits from Social Security. The costs start mushrooming in 2011, when the first boomers turn 65 and qualify for taxpayer-funded Medicare.
Early warning signs
But Americans needn't wait until 2008 or 2011 to see firsthand the escalating costs of these benefit programs. Medicare last month announced the largest premium increase in the program's 39-year history. In 2004 alone, federal spending on Medicare and Social Security will increase $45 billion, to $789 billion. That one-year
increase is more than the $28 billion budget of the Department of Homeland Security.
Many economists say a failure to confront the nation's debt promptly will only delay the inevitable.
"The baby boomers and the Greatest Generation are delivering an economic disaster to their children," says Laurence Kotlikoff, a Boston University economist and co-author of The Coming Generational Storm, a book about the national debt. "We should be ashamed of ourselves."
USA TODAY used official government numbers to compute what the burden means to the average American household. To pay the obligations of federal, state and local government:
•All federal taxes would have to double immediately and permanently. A household earning $100,000 a year would see its federal taxes double from an average of about $20,000 to $40,000 a year. All state taxes would have to increase 20% immediately and permanently.
•Or, benefits for Social Security, Medicare and government pensions
would have to be slashed in half immediately and permanently. Social Security checks would be cut from an average of $1,500 per month for couples to $750. Military pensions would drop from an average of $1,782 per month to $891. Medicare spending would fall from $7,500 to $3,750 annually per senior. The Medicare prescription-drug benefit enacted last year would be canceled.
•Or, a combination of tax hikes and benefit cuts — such as a 50% increase in taxes and a 25% reduction in benefits — would avoid the extremes but still require painful changes that are outside the scope of today's political debate. Savings also could come in the form of price controls on prescription drugs, raising retirement ages and limiting benefits to the affluent.
Every solution has the potential to damage the economy by reducing disposable income or diverting economic resources.
The estimates computed by USA TODAY are similar to ones by government watchdog agencies such as the Congressional Budget Office and the Government Accountability Office and respected think tanks such as the conservative American Enterprise Institute, the liberal Brookings Institution and the non-partisan Urban Institute.
"Political leaders know this is a big problem," says Glenn Hubbard, chairman of the Council of Economic Advisers for President Bush from 2001 to 2003. "I know the president is keenly aware. But in an election year, it's not easy to talk about. The solutions may be very painful. If he is re-elected, I think he will make this a top priority next year. I hope so."
"Economists agree this cannot go on," says Joseph Stiglitz, President Clinton's chief economic adviser from 1995 to 1997. "We can borrow and borrow, but eventually there will be a day of reckoning."
Economist James Galbraith of the University of Texas in Austin is a rare optimist in this debate. "I'm not at all concerned about Medicare or Social Security," Galbraith says. "Unless the government goes broke, Medicare isn't going to go broke, and the U.S. government isn't going to go broke because it can print money."
Galbraith says the country can handle higher tax rates, as Europeans do, and can save money by cutting spending elsewhere, such as on defense, and by implementing a Canadian-style health care system that uses private doctors and hospitals but has the government set prices and pay the bills.
"We are an enormously rich country," he says. "Providing health care and a modest living for our elderly is certainly something we can afford."
An aging population
Social Security was created in 1935 to help the elderly avoid poverty during the Great Depression. Medicare was established in 1965 to provide health care for the elderly, who were finding it increasingly difficult to afford medical care. But the aging of America and a declining birth rate have put these programs on a collision course with financial reality.
When the government set 65 as the retirement age in the 1930s, most people didn't live that long. But life expectancy for women has increased from 66 to 80 since 1940 and for men from 61 to 75.
Meanwhile, the birth rate has dropped from 25 births per 1,000 residents in the 1950s to just 15 today. The lower birth rate ultimately means fewer workers paying taxes to finance Social Security and Medicare benefits for the rapidly growing population of people 65 and over.
Medicare has had about 3.3 workers paying taxes for every recipient for the past 30 years. Baby boomer retirements will reduce that to just two workers supporting every Medicare recipient in 2040.
Immigration has helped offset some of the decline in birth rates. But immigration rates would have to increase by five or 10 times — above the recent peak of 1.2 million in 2001, legal and illegal — to provide enough workers and their payroll taxes to boost Medicare.
Medicare recipients are growing older and more expensive, too. Annual medical costs for an 85-year-old are double those of a 65-year-old. Federal spending per Medicare recipient will average $7,500 this year. The official projection for 2050: $26,683 per recipient in 2004 dollars.
A problem in plain view
The scope of the problem is no secret in Washington.
Medicare and Social Security trustees report the obvious every year: The system has no way to pay for itself, even under the rosiest scenarios. The Congressional Budget Office regularly updates Congress on the liabilities.
Bush's budget for the fiscal year that began Friday spells out the numbers in detail and concludes, "These long-term budget projections show clearly that the budget is on an unsustainable path."
Comptroller General David Walker, the government's chief accountant, travels the nation warning of the impending crisis. "I am desperately trying to get people to understand the significance of this for our country, our children, our grandchildren," Walker says. "How this is resolved could affect not only our economic security but our national security. We're heading to a future where we'll have to double federal taxes or cut federal spending by 50%."
But documentation of the problem hasn't prompted political action to address it. The $4.2 trillion national debt has generated some debate in Congress and the presidential campaign. But the government's obligations for Medicare and Social Security are 10 times the size of the national debt.
"We have instructed our politicians not to tell us about this problem," says Boston University economist Kotlikoff. "If they even mention cuts to Social Security, we vote them out of office."
Grim financial statement
To bring attention to the problem, USA TODAY prepared a consolidated financial statement for taxpayers, similar to what corporations give shareholders. The newspaper totaled federal, state and local government liabilities, taken from official documents.
Key findings:
•Total hidden debt. Federal, state and local governments today have debts and "unfunded liabilities" of $53 trillion, or $473,456 per household. An unfunded liability is the difference, valued in today's dollars, between what current law requires the government to pay and what current law provides in projected tax revenue.
•Social Security. The retirement program has $12.7 trillion in obligations it cannot meet for current workers and retirees at the current Social Security tax rate.
•Medicare. The health care program has a $30 trillion unfunded liability for people now in the system as workers or beneficiaries. The $30 trillion reflects the value today of the more than $200 trillion in deficits over 75 years to cover current workers and retirees at existing levels of benefits, tax rates and premiums. Medicare's new prescription-drug benefit, which starts in 2006, accounts for $6.9 trillion of the program's financial ill health.
How much is $30 trillion? The gross domestic product, the entire economic output of the USA, was $11 trillion last year.
"These numbers are staggering in their magnitude," says economist Thomas Saving, whom Bush appointed as a public trustee on the Medicare and Social Security board. "But when I testify before Congress, I'm the only one saying, 'We have a funding problem.' Everyone else is testifying for more benefits."
Like a home mortgage
The $53 trillion in liabilities is like a mortgage balance: That's what it would cost to pay off the debt now. The actual cost would be higher because of interest payments. A $100,000 mortgage at 5% interest, for example, actually requires $193,000 in income to repay over 30 years.
Under corporate accounting rules, a corporation would record a $100,000 liability on its books if it promised to pay $193,000 in medical benefits over 30 years. That liability would reduce profits immediately, when the promise was made, although the money would be paid over 30 years. Otherwise, shareholders could be fooled into thinking that the company was better off than it really was.
In fact, the company had committed $193,000 in future revenue — worth $100,000 today — to a retiree and couldn't use the money for shareholder profits.
Government doesn't follow this accounting rule. If it did, the federal deficit in 2004 would be $8 trillion, not $422 billion. The $8 trillion reflects the value of new financial obligations Congress approved without any way to pay for them,plus the year's operating deficit.
Government accounting rules are more lenient because, unlike a business, Congress can take whatever money it needs through taxes and renege on promises by passing new laws. Theoretically, the president and Congress could end all health care for the elderly tomorrow and cease Social Security payments the next day — or double or triple tax rates to pay the bills.
That's why AARP, a non-partisan lobbying group for people over 50, says the unfunded promises of Medicare and Social Security are less worrisome than they appear.
"The reason we make companies fund their pension liabilities is because it's uncertain they'll be around in the future. That doesn't apply to government," says John Rother, AARP's research director. "The size of the liabilities isn't relevant, nor is how much we put aside today. What matters is how healthy will the economy be in the future."
He agrees that Medicare has a long-term funding problem but says the nation's entire health system is the issue, not Medicare.
Alan Auerbach, director of the Burch Center for Tax Policy and Public Finance at the University of California-Berkeley, says people are understandably skeptical about gloomy predictions. But he says these numbers are not guesses.
"We can't predict major wars or major inventions," he says. "But we do know the baby boomers aren't going to disappear. We know pretty well that health care costs will rise because of new technology. I wish these were worst-case scenarios, but they're rather cautious best guesses. It could be much worse."
A bill coming due
The heart of the problem is that the Greatest Generation and baby boomers have promised themselves retirement benefits so generous — and have contributed so little to financing them — that even the most prosperous economy in history cannot pay the bill.
Consider a married couple who throughout their lives earned the median income — the amount at which half of Americans make more and half make less — and who will retire at age 65 next year. They earned $46,400 in their final year of work.
Mr. and Mrs. Median would get a joint Medicare benefit valued at $283,500, the Urban Institute estimates. That's the present value of the benefit — what it's worth today — not the larger amount the government will actually pay over the years. But the couple would have paid only $43,300 in Medicare taxes (valued in 2004 dollars). Taxpayers lose $240,200 on the deal.
But the Medians' good fortune doesn't end there. They also qualify for $22,900 in annual Social Security benefits, which rise annually with inflation.
Present value of the Social Security benefit: $326,000. Present value of Social Security taxes paid over a lifetime: $198,000.
Net loss to taxpayers: $128,000.
And the situation is worse than that. The federal government didn't save the money that the Medians paid in Medicare and Social Security taxes. It spent that money as it came in on other things — defense, education, past Medicare costs, etc. So the Social Security and Medicare taxes paid by Mr. and Mrs. Median won't help offset the cost of their benefits. The Social Security and Medicare trust funds have no money, only IOUs that other taxpayers must repay.
"These mythical trust funds are a financial oxymoron — they can't be trusted and they aren't funded," says Peter Peterson, a businessman and Commerce secretary under President Nixon who wrote the best seller Running on Empty: How the Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It.
Because the trust funds have been spent, taxpayers must come up with the full $609,500 that Mr. and Mrs. Median are entitled to under Medicare and Social Security. And the Medians are a bargain compared with what their 45-year-old children will cost.
Social Security is structured so that future generations get increasingly large benefits. And Medicare benefits rise with soaring health care costs.
The Medians' children would receive Social Security and Medicare benefits with a present value of $884,000 in 2004 dollars when they turn 65, according to the Urban Institute. That's 45% more than their parents would get.
For Hubbard, now dean of the Columbia Business School in New York, the stakes are clear: "The question is whether the political process will make gradual changes or we'll wait for a crisis."
Contributing: Paul Overberg, Bruce Rosenstein
All part of her argument that I should start putting my money into something more stable, like gold (apparently my aunt has a gold bar as her nest egg). I asked her what else people have been putting their money into, and she said that, in the past, items like bullets and alcohol have worked for some. What other items do you think could weather the drop of the dollar enough to become a commodity for trade?
