Debt Ceiling and Budget Cuts Take Center Stage

Congress and the White House are negotiating down to the wire about raising the nation's debt ceiling. At the center of the discussions are big budget cuts and the prospect of serious reductions to key senior entitlement programs. Virtually all independent experts agree that such cuts must be part of any successful effort to get enormous federal deficits under control. But there the agreement and often the discussion end.

[See 10 Steps to Fine-Tune Your Retirement Plan.]

AARP and literally hundreds of other senior groups have turned up the volume and the heat to oppose either any cuts to Social Security or Medicare, or any "unfair" cuts. The definition of a "fair" cut is very much in the eye of the beholder. When AARP recently opened the door to the possibility of future reductions to Social Security, smaller senior support groups began attacking it like a school of piranhas.

But as important as these programs are to seniors' well-being, the quality of most retirees' lives will be even more affected by the nation's future economic well-being. Maintaining a Social Security benefit would be a hollow victory in a future plagued by low growth, continued high unemployment, rising inflation, and a dollar that withers in value each year. Yet failure to control deficits makes such a future likely if not inevitable.

In its latest long-term budget assessment, the non-partisan Congressional Budget Office (CBO) last week provided another in a long series of bleak outlooks. It's not clear that the public either pays attention to these details or believes them, but here's a capsule of what the CBO sees during the coming 25 years. This period, of course, corresponds to the retirement years of most baby boomers.

[See When to Convert Your Savings Into an Annuity.]

The Big Picture: Federal debt equaled 40 percent of the nation's annual output in 2008 and will hit 70 percent at the end of this year—the highest since World War II. Under a set of assumptions the CBO considers likely, public debt would exceed 100 percent of the gross domestic product (GDP) by 2021, on its way to 135 percent by 2035. Well before that happened, growth and employment would suffer badly as federal spending crowded out other activity, led to soaring costs to finance the debt, and caused a commensurate decline in the value of the dollar. Even today, every American already is paying an invisible debt "toll" in the form of weak economic activity, anemic job creation, and eroding purchasing power.

Healthcare Spending: Federal spending on Medicare and Medicaid rose from 2.2 percent of GDP in 1985 to 5.5 percent in 2010. Of course, GDP has grown a lot over that period, but healthcare costs have consistently risen by faster rates than overall economic growth. Under conditions it judges most likely, the CBO says, Medicare spending alone would total 7 percent of GDP by 2035. The federal share of Medicaid spending and other health programs would reach about 4 percent of GDP. It's not only that Medicare and Medicaid are unsustainable; it's that the government has become the expected source of so much medical spending. In 2009, CBO says, government picked up 49 percent of the nation's $2.3 trillion healthcare tab. Who doubts that government's share topped 50 percent last year?

[See Top 10 Individual Tax Breaks.]

Social Security: Yes, the Social Security program is in better shape than other entitlements, and can pay out all benefits from its accumulated surpluses for another 25 years. But this feel-good statement masks the reality that the government spends more on Social Security than on any other program—$733 billion this year, or 20 percent of all federal spending. Future beneficiaries already are scheduled to receive benefits that are less generous than those paid to current retirees. But the numbers of older Americans is growing so rapidly that the program's overall spending burden will rise to 6.1 percent of GDP in 2035 from 4.8 percent today. "CBO projects that the population age 65 or older will increase by almost 90 percent between now and 2035, compared with an increase of just 11 percent over that period in the number of people ages 20 to 64," the report said. "About 97 million people will collect benefits in 2035, CBO projects, compared with 56 million who will receive them this year."

After kicking the budget-deficit can down the road for decades, we no longer can afford to continue ignoring the impact of a generation of irresponsible spending habits. Right now, the next 25 years look absolutely awful. Having many people and institutions to blame for this mess is fine, but the mess is still here. Elected leaders aren't the only ones who've looked the other way. So has most of the public. Is our day of fiscal reckoning finally here? Would you like to continue rolling the dice that it's not?

Twitter: @PhilMoeller

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