THE COMING SOCIAL SECURITY & MEDICARE DISASTER

PERCENTAGE INCREASES IN TAXATION OR CUTS IN
EXPENDITURE REQUIRED TODAY [2004 NUMBERS] TO
ACHIEVE GENERATIONAL BALANCE IN U.S. FISCAL POLICY

A financial and social disaster that will occur in your lifetime . . .

Policy Percentage Change

Increase Federal Income Taxes +69%
Increase Payroll Taxes +95%
Cut federal purchases -100%
Cut Social Security & Medicare -56%

These numbers are from 2004 – three years ago – in Niall Ferguson’s Colossus: The Rise and Fall of the American Empire, pages 270-271. The numbers are from a study done by Jagadeesh Gokhale, a senior economist at the Federal Reserve Bank of Cleveland, and Kent Smetters, the former deputy assistant secretary of economic policy at the U.S. Treasury..

The numbers above represent Gokhale’s and Smetters’ assessment of how much taxes would have to be raised, or expenditures cut – immediately and permanently, to pay off future expenditure commitments, including interest on the national debt.

The difference between expenditure commitments and expected revenues is based on 2004 numbers and added up to $45 trillion – an amount roughly four times the nation’s total output (GDP). It’s also an amount 12 times the nation’s official debt in 2004 – a number that’s significantly higher now.

This is the portrait of a disaster that's now underway, with the retirements of the first Baby Boomers, people who will also be on Medicare in another three years. It demonstrates a huge liability that will be borne largely by the children and grandchildren of Baby Boomers -- or perhaps not borne by them if they believe they're being shafted, which they will be.

Yes, it does mean what it says: that to meet future liabilities income taxes would have to rise by more than two-third, or, alternative payroll taxes (for Social Security and Medicare) would have to increase by 95%, or federal discretionary spending go down to zero, or Social Security and Medicare payments by cut by 56%.

Republicans don't like to talk about these emerging financial realities. Democrats never talk about them -- perhaps believing that, when the fiscal tsunami hits, they'll be safely dead. Lucky them.

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So, how do you explain this situation to ordinary mortals?

You ask an audience how many of them pay approximately $10,000, give or take a few thousand dollars? Then, you tell them that to even out tax revenues and expenditures, their tax would increase to roughly $16,9000. That is, they'd have nearly $7,000 a year LESS than they do now.

What if the government used payroll taxes (for Social Security and Medicare) instead of taxes. Then, if your payroll taxes added up now to $4,000, then the increase would go up 96%, nearly doubling to approximately $7,840 per year.

Or, if you're on Social Security and Medicare, the government could check your check -- and the amount provided through Medicare by 56%. Thus, if you and your spouse get combined Social Security payments of $24,000 annually ($2,000 per month), the yearly amount you receive would be reduced to $10,660 (or to $880 per month).

If you're used to getting by on $24,000 a year, chances are you wouldn't appreciate having to get by on $10,680 per year. Also, you're not going to like having Medicare pay for far less than half your medical expenses.

Of course, the number of politicians recommending such tax increases or expenditure reduction is roughly zero.

However, elected officials haven't exactly been rushing forward with alternatives.

Of course, there is yet another alternative: having your children, grandchildren, and great-grandchildren pay much higher income taxes and payroll taxes. They might not be exactly enthusiastic about that prospect. They just may start asking hard questions about why we believed it was their responsibility to pay huge sums to guarantee us an extremly comfortable retirement. They'll have a point.

Does anyone deny the situation I've outlined is coming to pass? Not any experts that I've heard about. Of course, some voters are in a state of permanent denial -- they're generally known as "Democrats."

When Republicans explain this depressing situation, they're not going to make a great number of new friends. That's the challenge.