Bankrupting America

June 1, 2008 – 12:01 pm

by Rolfe Winkler, CFA

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.

  1. 26 Responses to “Bankrupting America”

  2. The arguments that SS is “in trouble” are easily refutable. I don’t have time to do it, if interested read Baker/Weisbrots The Phony Crisis. Don’t know if you’re misinformed or are part of the privatize everything crowd. must be the latter because you are a very intelligent guy. But you’re misleading your readers.

    By Al on Jun 1, 2008

  3. Al–Please note this sentence from the post:

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

    So even if Social Security’s future funding problem is a non-issue, a point with which I disagree, I argue that health care spending remains a far more significant threat.

    A point on which Baker/Weisbrot would seem to agree: “In short, past rates of increase in health care spending are economically unsustainable….”

    or this (Baker/Weisbrot refuting what they call a common “canard”):

    “‘If nothing is done, Social Security and Medicare will eat up 90 percent of our federal budget by 2050.’ The trick here is throwing in Medicare, a separate program. The projected costs of Medicare are indeed out of control—a result of spiraling health care costs. This makes a strong case for health care reform….”

    So the overall point is that government spending on entitlements, led by health care, will bankrupt America if we continue on our current course.

    [Incidentally, to say that social security funding is a non-issue, you have to accept their argument that funding social security is a fundamentally different problem than financing the rest of the government's obligations. But the "assets" held by social security are T-bills. They're IOUs the government is writing to itself. If health care costs bankrupt the Federal Government, what exactly will be left to pay interest/principal on T-Bills held by social security?]

    By RolfeWinkler on Jun 1, 2008

  4. The people who don’t think SS is in trouble also don’t think its a problem that the “trust fund” is just a bunch of Treasury IOUs and that current taxpayers directly fund current beneficiaries. I’ve argued with Dean Baker extensively on this, and he doesn’t seem to believe this is a problem (eventually he does sort of acknowledge that breaking the SS implicit covenants to meet the gap would be required, which is exactly my point).

    By AaronKrowne on Jun 2, 2008

  5. Suppose the good fairy intervened and wiped out the Medicare financial obligation to this very moment.

    Even if Medicare were in good financial shape now, what would the future hold? People are living longer and longer due to extensive and increasingly expensive medical care. Does it make sense for a culture to place growing resources with those who are retired? I say this as a retiree myself. I enjoy life but I consider it a waste of public money to fund research investigating how to extend the lives of my cohort another decade.

    Maybe there should be a lifetime limit on Medicare funding – say, if $1 million in public funding has been expended on medical care for an individual after the age of 65, no more would be available. I don’t think I am entitled to an extended lifetime on the public tab. This is even more the case when my limited future is extended at the cost of a huge debt burden of those who must pay long after I’m gone.

    To put it simply – would a person do this thing, load this obligation onto his/her own children? I don’t think so.

    By ClifBrown on Jun 2, 2008

  6. In the late 1800s a doctor came out west and opened a small office. He was paid with whatever was available but when dollars were paid it was a dollars worth of service for a dollar paid. When he got married your medical dollar was now split in two as his wife uusually helped him. As his business grew to another doctor and his wife your medical dollar now is devided by 4.

    2008 very big HMC you bring a medical dollar for care. How much is you medical dollar worth.

    Insanity is doing things the same old way and expecting different results.
    1
    Overhauling the system will create the solution

    By michaelh on Jun 11, 2008

  7. I’ve worked in healthcare for over 20 years and people have seen the dark at the end of the tunnel for at least that long.

    Rolfe, healthcare for profit is not sustainable. What will the hospitals do when uninsured patients come through their doors? Toss them in the street?

    This is the reason why emergency rooms are closing–the costs are astronomical and there’s really no reason for it. We need more than national health care–we need *nationalized* healthcare. Making money off of the sick is a twisted idea–non-profit healthcare is the key to an affordable, compassionate American future.

    And it makes fiscal sense.

    Government hospitals should be created to care for the medicare patients. Doctors would work there. Private hospitals could be allowed to operate but the national hospitals would be free. Everyone would pay in, regardless of use of services.

    By Lisa on Jul 8, 2008

  8. thanks for this articel. Very Interessting theme i Think. Keep on it!

    By Riester Rente on Aug 25, 2008

  9. As to single pay medical plans, Mexico has such a plan, and for $175.00 / year it pays all medical costs including drugs! If Mexico can do this what is our problem? Politics!
    Lee

    By Lee on Sep 10, 2008

  10. Get rid of healthcare lobbying firms. The Power Issue of Fortune magazine, August 2003, listed Fierce, Isakowitz, (and now, Blalock). Shut down all lobbying. Drug companies can make profits, if and only if they produce workable, usable, drugs. There is no need for lobbying.

    All manufacturing costs have dropped, dropped, dropped and that includes medical device manufacturing.

    IT jobs were offshored to India because India provide superior math ability. You have to know their medical school training is top-notch. Unlike a radiologist in the US who makes millions (my uncle was one) radiologists in India make 12K per year. ALL US xrays should be shipped to India to be read and then returned. The American Medical Association won’t like it, but they can be dismantled. The Indians, for centuries, have had advance astronomy, not because they had the manufacturing capability to grind glass lenses, but because they had the math ability to track the heavens.

    Fierce, *Mark Fierce, old style politico and friend of Karl Rove* Isakowitz and Blalock exist to ensure the highest medical profits possible. They should be kicked so hard they never land.

    By FutureThink on Sep 14, 2008

  11. Very thorough essay and article indeed. I agree with the comments that making money off the sick is a twisted idea. That inevitably points to rampant capitalism as the culprit, as in the case of Lehman Bros and the financial ‘crisis’.
    Geoff D.

    By Geoff Dodd on Sep 29, 2008

  12. The USA needs then to re-focus on its Exports such as the ‘Volt’ made by GM. This car, developed properly, could take a lot of market share away from Toyota and Honda. GM needs to appeal to a global market, with a low cost version assembled in.. China, Philippines, Thailand, India, for example. Then with computer electronics, USA should also be able to start to dominate. So stop thinking recession and doom and gloom and get into investigating export industry winners. Geoff D.

    By Geoff Dodd on Sep 30, 2008

  13. Geoff D, let’s export your job to China. I’m sure someone over there can do it for less $$$.
    With people overseas getting paid so much less, Americans cannot compete. China/India can do high technology as well as manufacturing for less money. China can copy most anything America makes and build it for less money. Let’s send your job there, too. (Free trade is not fair trade.)

    By Master Scammer on Oct 9, 2008

  14. That’s right. In that case, the free market IS the culprit. Rampant capitalism, free to roam globally doesn’t work for established industrial nations, does it? It works for exploiters of cheap labor. The USA needs many think tanks to solve these trade problems and rebuild its economic supremacy. Or – be equal with others. GD.

    By Geoff Dodd on Oct 10, 2008

  15. The USA sucks up over 2/3 of the world’s capital so that we can continue to buy flatscreens, a new car every other year, and 3700 SQ-Ft houses we don’t need using money we never had in the first place. In return we offer the world cluster bombs, fictively valued paper assets and an assortment of oversized SUV’s that nobody wants or can afford. The USA hardly makes anything better the rest of the world these days. True wealth is created by manufacturing, mining and making something that others can’t make themselves. 70% of USA economy is consumer spending, a hopelessly unsustainable situation. The USA economy is basically a GIANT fraud. A depression is not avoidable at this point. As these bailouts continue and foreign investment declines, the US Treasury will be foreced to monetize the debt in about 9 months, i.e. print raw money to pay it’s bills. This deflationary cycle we see now will revert back into hyper-inflation and result in the total destruction of the US dollar. After this, US, Canadian and Mexican borders are disolved and US dollar replaced with new currency, the Amero. This currency will be virtual and linked to our national ID cards. Next step in implantable bio chip which results in total domination of ruling elite over the masses.

    By Mike T. on Nov 20, 2008

  16. Bankruptcy of material wealth can be remedied, but certainly not the bankruptcy of morality and basic honesty in all their dealings with others. Today the world looks at America with contempt and disgust for its moral bankruptcy
    than ever before.
    You deserve all the sufferings you have brought upon yoursleves. Cure is at hand if only you wake up to realitties and opt for a total change in your conduct.

    By aries31 on Nov 21, 2008

  17. “The arguments that SS is “in trouble” are easily refutable. I don’t have time to do it, if interested read Baker/Weisbrots The Phony Crisis. Don’t know if you’re misinformed or are part of the privatize everything crowd. must be the latter because you are a very intelligent guy. But you’re misleading your readers.

    By Al on Jun 1, 2008″

    The blindness of some amazes me. Sure the U.S. can meet it’s obligations with a continually growing economy and access to unlimited credit. What if the credit dries up? What if the economy corrects?
    We have been living on credit and now it’s time to pay up. Sooner or later the bill has to be paid. Looks like now is the time. The Government got caught up in the same greed as Wall Street. There was zero risk assessment. Well, the risk is materializing before our eyes.

    By Bob Sherman on Nov 25, 2008

  18. At you the excellent site, a lot of useful info and good design, thank.,

    By Kyle on Nov 27, 2008

  19. Isn’t it fair to expect healthcare reform during a period of crisis is the likely and preferred solution for medicare? The process will look a lot like the foreclosure crisis, only it will be people in health difficulties who will perish while remedies and bailouts swirl around them. Human nature requires the abuse, the insults, the executions, and the ritual suffering.

    By Steve on Dec 8, 2008

  20. The behemoth entitlements could bankrupt the US? First of all, the US, even if it chooses to renege on debts to sovereign wealth sources, will never go “bankrupt.” The problem for the US is trade and currency imbalances caused by massive deficits. The massive deficits began with hefty military expenditures in Vietnam. If the US continues its massive borrowing and currency creation to spend more on the military and defense sectors, agricultural subsidies, and economic stimuli to select entitled sectors (such as construction, real estate, financial services), the US soon will face extreme hyperinflation. These behemoth entitlements to the military-industrial complex will be the cause of this ensuing hyperinflation, not Social Security and Medicare expenditures which are minor in comparison.

    By H James, Chicago, IL on Jan 10, 2009

  21. H–Good thoughts, clearly the military and defense sectors are the recipients of gigantic federal spending. However, the long-run liabilities for Medicare and Social Security far outstrip all discretionary spending items combined. I’d recommend viewing IOUSA.

    By RolfeWinkler on Jan 10, 2009

  22. The SS retirement tax has been 100% in excess of payoouts for about twenty years (ever since the bipartisan gang under Reagan raised the taxes). The excess has been transferred to the general budget to help defray deficit spending (remember the “lockbox” that was such a hot issue in Bush v. Gore 2000?) The baby boomers funded cushy retirements for their parents, with SS retirement and Medicare, who paid almost nothing into the system.

    Ever wonder why your parents did so well and you haven’t saved much? Look at what you and your employer have paid out in entitlement taxes (what, 15.xx% now?)…what’s left to save? Hope you get some back in the estate.

    Now we have a relatively skimpy X and Y generations to support the numerous retiring baby boomers. That will require larger taxes or deficit financing. The government can never run out of money. It’s not an individual or a business. It can print all the money it wants, and will do so as required. What the consequence will be for international finance and money markets remains to be seen. So far, even as deficits soar, all the T-notes somehow get sold at lower and lower yields (stragne isn’t it?).

    Ultimately, there will be solutions, including deferred benefits, insufficient infaltion adjustments to lower the value of benefits, tax increases (hope not), benefit cuts. But the deficit hawks only hasten the current plunge into the Greater Depression, if they cut benefits and raise taxes in the economic situation now.

    By Dan on Jan 16, 2009

  23. read the book- 1984

    By Dave R on Jan 20, 2009

  24. I hate to say it (because no one will listen), but why can’t the US government sell assets? Let’s face it – we’re broke. The US government can sell: private land; national parks; mineral rights; museusms; military equipment; etc.

    Yes, we’ll miss the Grand Canyon and Yellowstone and the Smithsonian, and Fort Knox; but the fact is, we are broke and have to raise money somehow. If the choice is between grandpa eating catfood or some paintings in Washington…the paintings gotta go.

    http://menznews.blogspot.com

    By Joe Dokes on Feb 16, 2009

  25. Great article, and true. People who don’t agree, are in denial, like most in America. The denial in this country will be the end of us.

    By RC on Apr 10, 2009

  26. The Phony Crisis was written in 1999, and its basic tenet was that continued growth in the US economy (was ~1.7% pa when the book was written) would be more than enough to sustain SS and Medicare’s mounting forward liabilities.

    In the face of the GFC, much of the book’s intellectual foundation has crumbled; all exponential growth eventually halts.

    By GlennPeters on Apr 26, 2009

  27. Due to this economic condition all this is happening.

    By Apostille on May 12, 2009

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