Bankrupting America

June 1, 2008

There is a crisis confronting the U.S. Larger than war, more dangerous than Osama, more hazardous than recession, it threatens our status as the world’s preeminent economic superpower. If we fail to address this crisis, we face potentially “catastrophic consequences.”

The problem, which I discussed with former Government Accountability Office Chief David Walker, is the fiscal crisis we face with Medicare and Social Security.

After leading a “fiscal wake-up tour” to educate America about the crisis, Walker left GAO in March to head a new, billion-dollar foundation dedicated to solving it. More on that later; first his numbers.

Most know that Social Security’s finances are troubled. Few know that Medicare’s shortfall is five times larger….

If not reformed, the behemoth entitlements could bankrupt the US.

Medicare and Social Security are funded, not by trust funds, but by transfers from workers to retirees. Right now, there are more than enough workers to fund retiree benefits. But as boomers age and health care costs inflate, America’s obligations increase.

Walker has calculated those obligations:

To pay future Medicare bills, the federal government would, today, need to set aside $34 trillion dollars.

To pay future Social Security bills the US would need another $6.8 trillion.

How much has the government set aside to meet these obligations? $0.

Put another way, to help the federal government pay its bills over the next few decades, every person in America would, today, have to give Uncle Sam $175,000.

We can’t expect children and the unemployed to contribute, so what would each full-time worker have to fork over? $410,000.

The longer we wait to reform them, the larger the contribution per worker will have to be.

Americans don’t have that kind of money. Walker notes that at every level of society Americans are “addicted to debt.” The economy consumes billions more than it produces; the government spends billions more than it receives in taxes; and individual savings rates are near zero.

A straight-talking non-partisan whose findings are supported by think-tanks across the political spectrum, Walker compares America’s situation to the waning days of the Roman Republic, which collapsed under the weight of its fiscal and military obligations.

And Walker isn’t the only impartial observer that sees U.S. economic supremacy at risk. Earlier this year, the bond rating firm Moody’s said that if we fail to reform runaway entitlements, our national credit rating could be downgraded within 10 years. That could be a prelude to national bankruptcy.

“The worst case scenario,” Walker says, “is that we could suffer the same fate as Argentina.” The Argentine government went bankrupt in 2002 after running up massive debts during the 90s. Foreign capital fled the country, the banking system collapsed, inflation hit 80%, and unemployment reached 25% as the economy sank into a depression.

It would be foolish, by the way, to think we have 10 years to solve this problem. Our foreign creditors are forward-looking. They’ll stop lending long before our credit rating gets cut.

Yet not only are politicians refusing to speak out against ballooning entitlements, they’re making matters worse.

The Medicare drug benefit passed by the Republican Congress boosted future government obligations $8.4 trillion. And Democrats propose to increase our liabilities even more with “universal” health care.

But perhaps the biggest obstacle to reform–and the reason politicians won’t confront the issue–is the American people. We’ve grown “self-centered,” Walker argues, feeling entitled to ever-increasing benefits.

Walker’s passion to spread the gospel of entitlement reform recently brought him to the new, billion-dollar Peterson foundation. No longer an employee of the U.S. Congress, Walker will be free to speak his mind.

Though the foundation’s plans remain “under development,” hopefully their first proposal will be to cut benefits. The alternative, raising taxes, makes no sense with the economy headed for recession. New taxes would discourage job growth and investment just as we need them most.

The Federal Government can’t tax its way out of the entitlements crisis any more than Detroit can finance runaway health costs by charging more for its cars. In a global economy, just as there are alternatives to Detroit automobiles, there are other places to do business besides the United States.

Benefit cuts are the only solution that will ensure a fiscally sustainable future. Walker’s biggest challenge will be to convince Americans we have no choice but to sacrifice.

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