UCSC ECON 104 - America’s Economy: Headed for Crisis

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Toward a Brighter FutureLongevity adjustments. Raising the age at which retirees are eligible for full benefits (now 66 and scheduled to go up to 67 by 2025) makes good sense for several reasons:Personal accounts. One way that higher Social Security contributions could generate new saving would be if they were used to create personally owned accounts within the Social Security system. This reform could increase saving by providing a more reliable method of pre-funding promised benefits than government trust funds can ensure. The funds would be beyond the reach of government, and Congress could not double-count personal account assets in the federal budget. In other words, they would provide a “lockbox” no politician could pick.America’s Economy: Headed for Crisis Realistic Approaches Are Essential Warren B. Rudman, J. Robert Kerrey, Peter G. Peterson, and Robert Bixby Summary An honest assessment of the nation’s long-term fiscal outlook almost makes one wonder why, in 2008, so many people are interested in being elected President. And why so little attention is being paid to a problem that budget analysts of diverse perspectives routinely describe as “unsustainable.” One thing is clear: the status quo is not acceptable. The next President will inherit a fiscally lethal combination of changing demographics, rising heath care costs, and falling national savings. The public should take care not to buy the proposals of Presidential candidates that either ignore the magnitude of the long-term fiscal challenge or lock candidates into positions that make the problems insoluble. Improving the nation’s long-term fiscal outlook will require hard choices on spending and tax policy. Presidential candidates and their consultants might shy away from endorsing such choices on the campaign trail, but they should not rule them out. The next administration must enter office with a mandate to act on this problem. Doing so will likely require a mix of options arrived at through bipartisan negotiations. The more options taken off the table through ironclad campaign promises, the more difficult it will be to find meaningful solutions once the campaigns are over and the time for governing begins. Candidates must acknowledge the magnitude of the problem, the need for trade-offs and the necessity for prompt action. Vague promises The Brookings Institution | 1775 Massachusetts Ave., NW | Washington, DC 20036 | 202.797.6000 | Fax 202.797.2495 www.opportunity08.org | [email protected] 08: A Project of the Brookings Institution America’s Economy: Headed for Crisis 2 of “fiscal responsibility” give the public insufficient insight into how well candidates understand the task at hand. Comprehensive solutions may take considerable time to develop, and once implemented, should be subject to periodic review. However, as a framework for action the next President should:  Commit to a balanced budget  Take every reasonable step to constrain the rising cost of heath care and retirement programs⎯Social Security and, most especially, Medicare  Make clear to Americans that taxes cannot be cut over the long-term unless programs are cut commensurately, and  Prevent total spending, taxes, or debt from reaching levels that could reduce economic growth and future standards of living. Context The basic facts are not in dispute. What they portend is not just a short-term budget crunch but the long-term budgetary impact of an unprecedented demographic shift to an older society—one that will exert great pressure on the economy from programs such as Social Security, Medicare, and Medicaid. Key features driving the impending fiscal crisis are as follows:  Social Security, Medicare, and Medicaid already constitute 40 percent of the federal budget—before the baby boomers have begun to retire in any numbers.  Over the next 25 years, the number of Americans ages 65 and over is expected to grow from 12 to 20 percent of the population. The ratio of workers paying into Social Security and Medicare relative to the number of beneficiaries will fall by roughly one-third.  For the past 40 years, health care spending has consistently grown faster than the economy. If the same growth rate continues over the next 40 years, Medicare and Medicaid alone will absorb as much of our nation's economy as the entire federal budget does today.Opportunity 08: A Project of the Brookings Institution America’s Economy: Headed for Crisis 3  Higher saving levels today would contribute to a larger economy tomorrow, and that would make the looming fiscal burden more affordable. Unfortunately, Americans’ personal saving rate as a percentage of disposable income has steadily declined—from more than 7 percent in the early 1990’s to negative one percent in 2006. Net national saving, public and private combined, has plummeted from 8.5 percent of gross national income 25 years ago to less than 2 percent today.  In the absence of domestic saving, foreign sources have taken up the slack. The portion of the government’s privately held debt owned by foreign investors has risen from 37 to 54 percent since 2001.1 Reliance on foreign borrowing increases the budget’s exposure to international capital markets and decisions made by foreign interests. Moreover, interest payments on the national debt go to bond holders from abroad—a growing mortgage on our future national income.  Raising tax revenues to cover projected government spending would require today’s tax levels to increase by a third to a half by 2030, depending on the growth of health care costs. If we try to keep government revenues at today’s level and pay for the increase in Social Security, Medicare, and Medicaid by reducing spending on other programs, it would require a cut of between one-half to four-fifths by 2030—again depending on the path of health care spending. Another way to look at the size of the problem is to total up the government's explicit liabilities, such as the national debt, and its implicit obligations, such as future Social Security and Medicare benefits. According to the Government Accountability Office, all such “fiscal exposures” have a present value of $50 trillion—almost as much as today’s net worth of all household assets and far more than the commonly cited national debt, which is approaching $9 trillion.2 No one can say when all this


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UCSC ECON 104 - America’s Economy: Headed for Crisis

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