Feenix566
02-27-2006, 10:37 AM
This is a very long article, and the issue is very complex, but nonetheless this is a very serious issue that presents a very real threat to America's economy and her government.
A FISCAL WAKE UP CALL
Overview
It is often said that our political system only responds to a crisis. If that is true, we are in for big trouble.
Our nation is about to undergo an unprecedented demographic transformation -- with no idea of how to pay for it. The coming age wave is not a temporary challenge that will recede once the baby boom generation passes away. The boomers’ retirement is ushering in a permanent transformation to an older population—and a permanent rise in the cost of programs such as Social Security, Medicare and Medicaid, which already comprise 42 percent of the federal budget.
It is true that there is no immediate crisis. Yet, a broad bipartisan consensus exits that current fiscal policy is on an unsustainable path. No one can say exactly when a crisis will hit, but by the time it does we will have likely burdened the economy with a debilitating amount of debt; leaving painful benefit cuts and steep tax increases as the only solutions. Doing nothing to avoid such a gut-wrenching outcome, knowing full well that it could occur, would be an act of fiscal and generational irresponsibility.
Older people rely heavily on government entitlement programs and their numbers are soon expected to grow as the post-World War II baby boomers enter their retirement years. There are 37 million people in the population age 65 and older today. By 2025, it is estimated that there will be 62 million. By 2045, they will rise to nearly 80 million, or more than double their current number. In contrast, by 2025 the number of people working in the economy is estimated to rise by only 13 percent, and by 2045, only 20 percent.
This dynamic has troublesome implications for the budget and the economy. Demographic change, however, is only part of the problem. Health care prices continue to outpace economic growth and this phenomenon greatly compounds the growing costs attributable to the rising number of aged.
Without a change in policy, by the time today’s 20-year olds reach retirement age the cost of government as a share of the economy is on track to be at levels not seen since the nation was fighting World War II -- the big difference being that instead of spending the money on a life and death struggle against totalitarian aggression we would be spending it on an ever-rising stream of benefit payments.
Today, governmental expenditures absorb 20 percent of the economy (GDP). At the high end of what the nonpartisan Congressional Budget Office (CBO) sees as a possible range, federal spending could rise to 56 percent of GDP in 2050. In contrast, federal spending never went above 44 percent of GDP throughout World War II.
While it may be unrealistic to assume that half the nation’s economic output could be consumed by government programs, even if the cost of government rose to 30 percent of GDP, the share of the economy needed would be 50 percent greater than it is today.
This raises an obvious question: how will we pay for it? Federal tax receipts have hovered in the range of 18 percent of GDP over the past half century. In 2000, they reached 21 percent of GDP. Today they stand at 17.5 percent. The federal budget deficit, $318 billion in the 2005 fiscal year that ended on September 30, is 2.6 percent of GDP.
If retirement and health care entitlements are allowed to grow on autopilot pushing total federal spending to 30 percent of the economy, and Americans’ intolerance for taxes above 20 percent of GDP holds true, the resulting deficits will rapidly escalate to dangerous levels. A deficit equaling 10 percent of GDP in today’s terms is the equivalent of $1.3 trillion a year. That amount is roughly half of today’s total government expenditures. The prospects of being able to carry that amount of new debt, year after year, without stifling the economy are nil.
The choices we make now will determine what kind of society our children and grandchildren inherit 20 and 30 years from now. There is little time for political gridlock. With the first of the 77 million baby boomers on the verge of retirement, the window of opportunity to act is rapidly closing.[1] Inaction now increases the prospects of severe changes later. Every year that alterations are put off greatly raises the risk of large tax increases or sudden benefit reductions in the future.
Short-term outlook
There is at least one positive thing to report on the budget front: at $318 billion, the deficit in 2005 was $95 billion lower than the $413 billion deficit in 2004.[2] Moreover, CBO’s January 2006, Budget and Economic Outlook shows a gradual improvement in the deficit over the next decade even as the baby boom generation begins to retire. In fact, by 2012 small surpluses return. As a result, the cumulative deficit over the 10-year horizon is a relatively modest $832 billion.
Does this mean that we are on a smooth and easy road back to balanced budgets? Not at all. The good news is superficial. Both CBO and the President’s Office of Management and Budget (OMB) say that the deficit will likely go up in 2006 to a range of $360 billion to $400 billion.
The deceptively benign outlook beyond that is not because spending on health care and retirement programs is held in check. To the contrary, between 2006 and 2016 the cost of Social Security, Medicare, and Medicaid will increase by 24 percent—from 8.7 to 10.8 percent of GDP. As a result, these three programs, which consumed 42 percent of federal spending in 2005, will consume 56 percent by 2016.
The reason why CBO’s official baseline appears so positive is that it assumes Congress and the President will hold discretionary programs, including defense, to just 2 percent growth annually -- as opposed to 8 percent last year and a 5.3 percent annual average rate from 1994 through 2004 -- and that they will not enact legislation to extend any expiring tax cuts or provide relief from the Alternative Minimum Tax (AMT)[3].
Not surprisingly, actual budget outcomes tend to be worse than CBO’s baseline projections, which assume no changes to current polices.[4] Experience demonstrates that legislative activity is likely to increase deficits, particularly since there is no longer a consensus to balance the budget and strong enforcement measures that would hold the budget in check are absent.
This year will be no exception. Pursuant to the FY 2006 Congressional Budget Resolution, the House and Senate are debating a package of tax provisions with an estimated revenue loss that could go as high as $106 billion over 5 years – almost three times the amount of entitlement savings enacted earlier ($39 billion) as part of the so- called “Deficit Reduction Act of 2005.” In other words, the “deficit reduction” in the spending bill stands to be more than given back when the tax reduction part of the 2006 budget plan is enacted.
On the discretionary side of the budget, which is determined by annual appropriations, Congress and the President have already approved $62 billion of supplemental spending in response to the devastation of Hurricane Katrina. Higher amounts are expected as the full extent of the damage to the Gulf Coast region becomes apparent. Deficits in the range of $350 billion to $400 billion now seem likely for 2006 and 2007.
In addition to the recent emergency spending, current budget projections are unusually complicated by a number of other factors -- some on the spending side and some on the revenue side. On the spending side, projections are complicated by the treatment of operations in Iraq and Afghanistan. The Bush Administration has chosen to treat each year’s expense as a one-time event on the theory that future costs are unknowable. This has the effect of understating outlays in the President’s budget projections because it assumes no continuing costs in Iraq and Afghanistan even though, as the Administration acknowledges, that will not be the cas
On the other hand, the CBO’s latest budget projections probably overstate likely costs for these operations because, in keeping with the scoring conventions of budget laws, it assumes that this year’s level of appropriations (including the war costs) will continue each year adjusted for inflation. The effect of this is to assume that operations in Iraq and Afghanistan (along with Hurricane Katrina relief efforts) will continue at their current level for the next 10 years. While this outcome is not impossible, a more probable projection would fall somewhere between 10-year costs at the current level and the Administration’s official assumption that there will be no further costs beyond those requested in this year’s budget.
Projections on the revenue side of the budget are complicated by two factors; the scheduled expiration in 2011 of the tax cuts enacted since 2001 and the growing toll of the Alternative Minimum Tax (AMT), which if not adjusted will apply to roughly eight times as many taxpayers by 2010 as it does today. In preparing its baseline, CBO must assume that current law is carried out; it cannot assume policy changes. Thus, however politically improbable, the baseline assumes a revenue windfall from expiring tax cuts in 2011 and rapidly growing receipts from the AMT.
Taking all these factors together, CBO’s January baseline is much too optimistic. A more plausible deficit path based on recent experience would:
* Assume a phase-down of supplemental funding for Iraq and Afghanistan and assume that regular appropriations grow with the economy instead of at the rate of inflation as assumed in the projections (net added spending of $932 billion)
* Assume that expiring tax cuts are extended as proposed by the President and Republican majority in Congress ($2 trillion revenue loss)
* Assume continuing relief from the AMT by adjusting it for inflation ($865 billion revenue loss)
* Deduct another $700 billion for added debt service cost on the above changes
Under that scenario, deficits would total $5.3 trillion over the 2007 to 2016 period, instead of the $832 billion projected in CBO’s official baseline (see figure 1).
Regardless of the outlook for the next 10 years, CBO warns that “growing resouse demands for [Social Security, Medicare and Medicaid] will exert pressure on the budget that economic growth alone is unlikely to eliminate.” As a result, CBO concludes, “A substantial reduction in the growth of spending and perhaps a sizable increase in taxes as
a share of the economy will be necessary for fiscal stability to be at all likely in the coming decades.”[5]
The real question is whether the President and Congress are up to this challenge or will they be content to let these developing problems fester in hopes that future lawmakers -- with fewer choices and perhaps acting under crisis circumstances -- can find solutions.
http://www.concordcoalition.org/events/fiscal-wake-up/fiscal-wake-up-call.htm
What will happen if the federal government collapses under the weight of the debt incurred as a result of these social programs, and the unwillingness to pay for them?
A FISCAL WAKE UP CALL
Overview
It is often said that our political system only responds to a crisis. If that is true, we are in for big trouble.
Our nation is about to undergo an unprecedented demographic transformation -- with no idea of how to pay for it. The coming age wave is not a temporary challenge that will recede once the baby boom generation passes away. The boomers’ retirement is ushering in a permanent transformation to an older population—and a permanent rise in the cost of programs such as Social Security, Medicare and Medicaid, which already comprise 42 percent of the federal budget.
It is true that there is no immediate crisis. Yet, a broad bipartisan consensus exits that current fiscal policy is on an unsustainable path. No one can say exactly when a crisis will hit, but by the time it does we will have likely burdened the economy with a debilitating amount of debt; leaving painful benefit cuts and steep tax increases as the only solutions. Doing nothing to avoid such a gut-wrenching outcome, knowing full well that it could occur, would be an act of fiscal and generational irresponsibility.
Older people rely heavily on government entitlement programs and their numbers are soon expected to grow as the post-World War II baby boomers enter their retirement years. There are 37 million people in the population age 65 and older today. By 2025, it is estimated that there will be 62 million. By 2045, they will rise to nearly 80 million, or more than double their current number. In contrast, by 2025 the number of people working in the economy is estimated to rise by only 13 percent, and by 2045, only 20 percent.
This dynamic has troublesome implications for the budget and the economy. Demographic change, however, is only part of the problem. Health care prices continue to outpace economic growth and this phenomenon greatly compounds the growing costs attributable to the rising number of aged.
Without a change in policy, by the time today’s 20-year olds reach retirement age the cost of government as a share of the economy is on track to be at levels not seen since the nation was fighting World War II -- the big difference being that instead of spending the money on a life and death struggle against totalitarian aggression we would be spending it on an ever-rising stream of benefit payments.
Today, governmental expenditures absorb 20 percent of the economy (GDP). At the high end of what the nonpartisan Congressional Budget Office (CBO) sees as a possible range, federal spending could rise to 56 percent of GDP in 2050. In contrast, federal spending never went above 44 percent of GDP throughout World War II.
While it may be unrealistic to assume that half the nation’s economic output could be consumed by government programs, even if the cost of government rose to 30 percent of GDP, the share of the economy needed would be 50 percent greater than it is today.
This raises an obvious question: how will we pay for it? Federal tax receipts have hovered in the range of 18 percent of GDP over the past half century. In 2000, they reached 21 percent of GDP. Today they stand at 17.5 percent. The federal budget deficit, $318 billion in the 2005 fiscal year that ended on September 30, is 2.6 percent of GDP.
If retirement and health care entitlements are allowed to grow on autopilot pushing total federal spending to 30 percent of the economy, and Americans’ intolerance for taxes above 20 percent of GDP holds true, the resulting deficits will rapidly escalate to dangerous levels. A deficit equaling 10 percent of GDP in today’s terms is the equivalent of $1.3 trillion a year. That amount is roughly half of today’s total government expenditures. The prospects of being able to carry that amount of new debt, year after year, without stifling the economy are nil.
The choices we make now will determine what kind of society our children and grandchildren inherit 20 and 30 years from now. There is little time for political gridlock. With the first of the 77 million baby boomers on the verge of retirement, the window of opportunity to act is rapidly closing.[1] Inaction now increases the prospects of severe changes later. Every year that alterations are put off greatly raises the risk of large tax increases or sudden benefit reductions in the future.
Short-term outlook
There is at least one positive thing to report on the budget front: at $318 billion, the deficit in 2005 was $95 billion lower than the $413 billion deficit in 2004.[2] Moreover, CBO’s January 2006, Budget and Economic Outlook shows a gradual improvement in the deficit over the next decade even as the baby boom generation begins to retire. In fact, by 2012 small surpluses return. As a result, the cumulative deficit over the 10-year horizon is a relatively modest $832 billion.
Does this mean that we are on a smooth and easy road back to balanced budgets? Not at all. The good news is superficial. Both CBO and the President’s Office of Management and Budget (OMB) say that the deficit will likely go up in 2006 to a range of $360 billion to $400 billion.
The deceptively benign outlook beyond that is not because spending on health care and retirement programs is held in check. To the contrary, between 2006 and 2016 the cost of Social Security, Medicare, and Medicaid will increase by 24 percent—from 8.7 to 10.8 percent of GDP. As a result, these three programs, which consumed 42 percent of federal spending in 2005, will consume 56 percent by 2016.
The reason why CBO’s official baseline appears so positive is that it assumes Congress and the President will hold discretionary programs, including defense, to just 2 percent growth annually -- as opposed to 8 percent last year and a 5.3 percent annual average rate from 1994 through 2004 -- and that they will not enact legislation to extend any expiring tax cuts or provide relief from the Alternative Minimum Tax (AMT)[3].
Not surprisingly, actual budget outcomes tend to be worse than CBO’s baseline projections, which assume no changes to current polices.[4] Experience demonstrates that legislative activity is likely to increase deficits, particularly since there is no longer a consensus to balance the budget and strong enforcement measures that would hold the budget in check are absent.
This year will be no exception. Pursuant to the FY 2006 Congressional Budget Resolution, the House and Senate are debating a package of tax provisions with an estimated revenue loss that could go as high as $106 billion over 5 years – almost three times the amount of entitlement savings enacted earlier ($39 billion) as part of the so- called “Deficit Reduction Act of 2005.” In other words, the “deficit reduction” in the spending bill stands to be more than given back when the tax reduction part of the 2006 budget plan is enacted.
On the discretionary side of the budget, which is determined by annual appropriations, Congress and the President have already approved $62 billion of supplemental spending in response to the devastation of Hurricane Katrina. Higher amounts are expected as the full extent of the damage to the Gulf Coast region becomes apparent. Deficits in the range of $350 billion to $400 billion now seem likely for 2006 and 2007.
In addition to the recent emergency spending, current budget projections are unusually complicated by a number of other factors -- some on the spending side and some on the revenue side. On the spending side, projections are complicated by the treatment of operations in Iraq and Afghanistan. The Bush Administration has chosen to treat each year’s expense as a one-time event on the theory that future costs are unknowable. This has the effect of understating outlays in the President’s budget projections because it assumes no continuing costs in Iraq and Afghanistan even though, as the Administration acknowledges, that will not be the cas
On the other hand, the CBO’s latest budget projections probably overstate likely costs for these operations because, in keeping with the scoring conventions of budget laws, it assumes that this year’s level of appropriations (including the war costs) will continue each year adjusted for inflation. The effect of this is to assume that operations in Iraq and Afghanistan (along with Hurricane Katrina relief efforts) will continue at their current level for the next 10 years. While this outcome is not impossible, a more probable projection would fall somewhere between 10-year costs at the current level and the Administration’s official assumption that there will be no further costs beyond those requested in this year’s budget.
Projections on the revenue side of the budget are complicated by two factors; the scheduled expiration in 2011 of the tax cuts enacted since 2001 and the growing toll of the Alternative Minimum Tax (AMT), which if not adjusted will apply to roughly eight times as many taxpayers by 2010 as it does today. In preparing its baseline, CBO must assume that current law is carried out; it cannot assume policy changes. Thus, however politically improbable, the baseline assumes a revenue windfall from expiring tax cuts in 2011 and rapidly growing receipts from the AMT.
Taking all these factors together, CBO’s January baseline is much too optimistic. A more plausible deficit path based on recent experience would:
* Assume a phase-down of supplemental funding for Iraq and Afghanistan and assume that regular appropriations grow with the economy instead of at the rate of inflation as assumed in the projections (net added spending of $932 billion)
* Assume that expiring tax cuts are extended as proposed by the President and Republican majority in Congress ($2 trillion revenue loss)
* Assume continuing relief from the AMT by adjusting it for inflation ($865 billion revenue loss)
* Deduct another $700 billion for added debt service cost on the above changes
Under that scenario, deficits would total $5.3 trillion over the 2007 to 2016 period, instead of the $832 billion projected in CBO’s official baseline (see figure 1).
Regardless of the outlook for the next 10 years, CBO warns that “growing resouse demands for [Social Security, Medicare and Medicaid] will exert pressure on the budget that economic growth alone is unlikely to eliminate.” As a result, CBO concludes, “A substantial reduction in the growth of spending and perhaps a sizable increase in taxes as
a share of the economy will be necessary for fiscal stability to be at all likely in the coming decades.”[5]
The real question is whether the President and Congress are up to this challenge or will they be content to let these developing problems fester in hopes that future lawmakers -- with fewer choices and perhaps acting under crisis circumstances -- can find solutions.
http://www.concordcoalition.org/events/fiscal-wake-up/fiscal-wake-up-call.htm
What will happen if the federal government collapses under the weight of the debt incurred as a result of these social programs, and the unwillingness to pay for them?