October 4, 2013 – U.S. Faces Financial Disaster from Baby Boomer Budget Bomb: As President Barack Obama and Congress continue to bicker over passing the federal budget and raising the government’s debt ceiling, a report published by one of the nation’s most credible agencies warns that the U.S. could face economic disaster due to excessive government spending.
Obamacare is part of the problem, but so are Medicaid, Medicare, and Social Security. The cost of these programs will mushroom as tens of millions of baby boomers reach retirement age.
The report was published on Sept. 17 by the nonpartisan Congressional Budget Office. It’s most optimistic forecast shows the federal debt growing to 100% of annual economic output by 2038, from an “already quite high 73%” today. That would make the U.S. like France, which in terms of fiscal strength is none too good.
But the CBO implicitly concedes that the outcome is likely to be a lot worse than that, and so it included its “alternative fiscal scenario,” which is far more realistic. It projects the federal debt will grow to 190% of the nation’s annual economic output by 2038. That would make us worse than Greece today, which has a 27% unemployment rate and periodic bloody riots over its dreadful economic conditions.
It is a truism of American democracy that politicians’ time horizons rarely extend beyond the next election. That’s why you have to go back nearly 15 years to find a president squarely addressing the baby-boom budget bomb. In his State of the Union address in January 1999, Bill Clinton urged Congress to seize “an unsurpassed opportunity to address a remarkable new challenge, the aging of America.” With the winds of a budget surplus at his back, Clinton declared that “now is the moment for this generation to meet our historic responsibility to the 21st century.”
So much for responsibility. The big opportunity slipped away, and fiscal planning has since devolved into a series of standoffs verging on defaults and shutdowns. The latest one has Washington paralyzed right now.
DEMOGRAPHICS ARE A KEY DRIVER of future spending. By 2038, there will be 79.1 million U.S. residents 65 and over, up from 44.7 million today. The working-age population, 18 to 64, will grow at a much slower rate, to 214.7 million from 197.8 million. As a result, this “dependency ratio” will plummet to 2.7 working-age people to support each senior in 2038, from 4.4 today, as illustrated by the above chart.
But since the elderly population won’t begin to reach critical mass until the mid-2020s, the rising tide of red ink will be relatively contained for the next decade. Under the alternative fiscal scenario, the increase in the debt-to-economic-output ratio will be relatively modest over the next 10 years, rising just eight percentage points, to 81%, before exploding to 138% by 2033 and 190% in 2038.
The math is pretty straightforward. Retiring baby boomers are pushing up the cost of elder-care entitlements. Mainly as a result, spending will rise much faster than revenues. Deficits will therefore be incurred every year, adding to the debt. That the federal government can no longer be expected to balance its budget, however, is not in itself the reason the CBO calls the trend unsustainable. The trend cannot be sustained because yearly deficits will be so large that the debt will grow faster than the economy’s ability to pay for it.
Because most standard projections extend just 10 years, however, the media has helped stoke complacency about the budget, ignoring repeated warnings from the CBO about the misleading nature of the 10-year outlook.
The CBO’s new 25-year projections should again make the message clear: The next decade is the relative calm before the coming storm. Any short-term improvement in the budget during the recent upswing in the business cycle is negligible when measured against looming long-term shocks.
Speaking of entitlement programs at his Sept. 17 news conference, CBO Director Elmendorf commented, “We as a society have a fundamental choice of whether to cut back on those programs or to raise taxes to pay for them. So far, we’ve chosen to do very little of either.” (Credits – By Gene Epstein for Barron’s Magazine, Images by Bloomberg and Getty).
The Master of Disaster