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Why budget fixes can't wait

Rising longevity, healthcare costs, and federal obligations will force a reckoning in the US, experts say.

By Staff writer of The Christian Science Monitor / January 10, 2006



After another year of failed reform, America's preferred plan to pay for Social Security and Medicare seems clear: Wait and see if we can muddle through.

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President Bush's all-out White House effort to sell Social Security reform fizzled. The program that began in 1935 is now projected to be unable to meet all its financial obligations by 2041.

Congress did make some cuts to Medicare last month. But it's a drop in the bucket compared with the costs of a new prescription-drug benefit. Medicare trustees say the program could face shortfalls starting in 2015, with the trust fund dry by 2020.

On some policy matters, muddling through can work. But is it a viable way to contain the surging cost of entitlements that some experts say threatens US prosperity? Can a mighty domestic economy and willing foreign lenders keep the United States financially sound without major policy reform?

It's true that the forecasts rest on a multitude of assumptions that may prove too optimistic - or pessimistic. Factors such as the changing lifestyles of older citizens, the rate of healthcare inflation, the pace of economic growth, and even the savings habits of people in China could alter projected outcomes significantly.

Moreover, Social Security's liabilities - a focus of fierce political debate - are actually far less challenging than those of Medicare and Medicaid.

But entitlement experts say the magnitude of this fiscal time bomb is such that "wait and see" won't work. Major tax hikes and benefit cuts may be needed.

"We have a big problem," says Laurence Kotlikoff, a Boston University economist. "The biggest [economic] risk we face is a major financial meltdown, leading to high interest rates.... Why? Because the country is broke" - or, at least, it would be if all its future obligations were counted and tax rates didn't rise.

"Everyone who gets into this boat has to print money," Dr. Kotlikoff says, from the Roman emperor Diocletian to perhaps a future chairman of the US Federal Reserve.

Key issue: healthcare, not boomers

While much attention is focused on the baby boomers, who began to turn 60 this month, the problem isn't really their looming retirement.

The nub of the challenge is the confluence of three long-term trends: People are living longer, healthcare costs keep rising, and government has promised to pay much of the tab for retirees. Prescription-drug coverage is the latest example of promises rising faster than funding.

"With the stroke of a pen [President Bush] creates a liability that's actually twice the size of Social Security problem," in terms of its future shortfall, says Kent Smetters, a professor of risk management at the University of Pennsylvania.

These trends take the US government - and the nation's economy - into uncharted waters.

How bad is it? Dr. Smetters and Jagadeesh Gokhale of the Cato Institute have calculated the present value of the government's "fiscal imbalance," based on all projected future spending and income.

The unfunded tab: about $65 trillion dollars.

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