Boomer Retirement

The Boomers’ Time Bomb Denial (washingtonpost.com)
Samuelson again. It’s an excellent assessment of the government’s financial situation that doesn’t take into account any reform of entitlements. I’m not as alarmed because I know taxes will be raised and I’m optimistic that entitlements will be reformed in such a way as to keep the fiscal burden down. Even the SSA has admitted that more than half of Social Security can be privatized over a few decades. The sooner that happens the sooner we can get compounding working in our favor. Right now it’s working against us in the form of future outlays.

To leaders of both parties, offending today’s voters with unpopular solutions to future problems makes no sense. Indeed, Republicans and Democrats will gladly worsen tomorrow’s problems to win more of today’s votes. President Bush did precisely that in successfully advocating a new Medicare drug benefit. Although Democrats criticized him, their complaint was that the new benefit isn’t generous — aka expensive — enough.

It’s expensive anyway. The spending is usually described as $400 billion over the next decade, but the CBO report says that when the drug benefit is fully phased in, it will cost about 1 percent of gross domestic product annually by 2030. That’s about $110 billion in today’s dollars, and these costs will simply increase total spending for Social Security, Medicare and Medicaid (Medicare provides basic health insurance for the elderly; Medicaid covers some nursing home care).

Now, let’s examine the overall numbers. In 2002 total federal spending (except interest on the debt) was 17.8 percent of GDP. Under one CBO projection, that increases almost two-fifths, to 24.5 percent of GDP, by 2030. Another projection shows an increase of only a sixth, to 20.8 percent of GDP. The main difference between the two projections involves assumptions about higher health costs, but unfortunately both projections may be optimistic. Why? Well, the CBO offsets some of the higher spending for the elderly by assuming modest reductions in other federal spending as a share of GDP from 2002 levels.

Under both projections, defense spending declines to its lowest share of GDP since 1940. And then there’s the rest of government: homeland security, national parks, health research, school aid, highways, food stamps, meat inspections — and much more. This spending also drops as a share of GDP. If you assume these cutbacks don’t occur spontaneously, then federal spending in 2030 could be higher than the projections — and they don’t include interest on the debt (about 1.5 percent of GDP in 2003) or allow for big emergencies. What if there’s an epidemic that dwarfs AIDS?

All projections involve huge uncertainties, but federal spending is clearly moving toward a higher plateau. Immense tax increases would be needed to pay for this spending. In the past 30 years, federal taxes have averaged 18.4 percent of GDP, slightly higher than they are today. Raising taxes from this level to, say, 24 percent of GDP involves an increase of almost a third, amounting to $600 billion a year in today’s dollars. How well would the economy fare with much higher taxes? No one knows. But choices inevitably will be made. If spending — on the elderly or everything else — isn’t cut or taxes raised, deficits will spin out of control.

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