Long-term problems tend to get pushed aside in a town driven by the biennial election cycle. Even when politicians pretend to be thinking “long-term,” it’s usually in a distorted, short-term way. Take the national debt, which always gets a lot of attention. The debt is a concern, but it pales next to the true debt, which is more off the books than on.
Ever since Congress raised the debt ceiling in May, there has been a lot of hand wringing about the size of annual budget deficits under President Bush. The deficit and the debt are trotted out by Republicans as a reason to cut discretionary spending and by Democrats as a reason to hike taxes. But this is more posturing for tactical short-term advantage than an attempt to confront a serious problem.
The deficit is actually quite modest in historical terms. In fiscal 2005, it was only 2.6 percent of GDP, lower than every single year between 1980 and 1994, a period of low interest rates and strong economic growth. So far in 2006, the deficit has been shrinking as tax revenues have increased, and will likely be about 2 percent of GDP by year-end. If the deficit looks big in absolute terms, it’s only because the economy is so much larger than ever before.
Since current budget deficits are affordable, any fiscal focus on them is misdirected. That said, the country’s true fiscal outlook is not so good. A pair of reports released in May by the Medicare and Social Security Trustees and the Government Accountability Office, respectively, should serve as a wake-up call for the public and our elected representatives.
The publicly held debt, which is the sum total of all the outstanding bonds that the government has used to finance its deficit spending over the years, stands at about $4.8 trillion. The GAO’s analysis found that other on-the-books debts — mostly related to military and civilian pensions and retiree health — add another $5 trillion.
The off-the-books, unfunded obligations of the federal government are an order of magnitude greater. The GAO found that the government’s true debt — on-the-books and off — more than doubled between 2000 and 2005, and now stands at a staggering $46.4 trillion.
GAO, it seems, actually low-balled the true debt by using the entitlement obligations for only the next 75 years. To permanently fix these programs we’d have to put up enough money to cover all of their obligations forever. That’s where the Trustees Report comes in. Using the estimates from that report, the federal government’s true debt is shown to be a stunning $94.7 trillion. That’s more than $315,000 owed by every man, woman, and child in the United States. That’s $1.25 million in debt for every family of four.
The Social Security program alone has a $13.4 trillion liability, more than all of the government’s on-the-books debt combined. Bush showed political courage when he took on Social Security reform last year, but he ran into a brick wall of opposition.
Even more disheartening, while Social Security reform was failing, the president and Congress came together to pass the Medicare prescription-drug benefit, which by itself created a $16.2 trillion new liability for taxpayers — more than the entire Social Security shortfall. Overall, Medicare has about $70 trillion in liabilities, about three-quarters of the federal government’s fiscal exposures.
This is an odd time for the free-market movement. On the face of things, we’ve won. It’s been a decade since Bill Clinton declared the era of big government over, and Republicans now control all levers of political power in Washington and most in states, too. Bush was elected and re-elected on a message of tax-rate reductions, spending restraint, and government reform. The policy mix seems to be working quite well, with a robust economic recovery well underway.
But beneath the surface, demographics dictate a much darker outlook for the intermediate and longer-term. Despite all of the policy and political successes of the free-market movement, if we fail to reform Social Security and Medicare, government is on track to be larger and more intrusive than ever before.
Unless our president and legislators stop playing deficit blame games and start to work on meaningful entitlement reform, these costly programs will place an impossible burden on our children and grandchildren.
– Mr. Kerpen is a policy analyst in Washington.