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The $44 trillion hole? Recent study says Social Security, Medicare shortfalls could be far bigger than previously thought.
May 29, 2003: 3:46 PM EDT
By Mark Gongloff, CNN/Money Staff Writer

NEW YORK (CNN/Money) - Many economists worry that the U.S. federal budget deficit could approach a record $500 billion this year.

Few, however, have grasped that the fiscal problems facing the United States could make an itty bitty $500 billion deficit look like pocket change.

Try $44.2 trillion on for size.

That's the total "fiscal imbalance" figure Jagadeesh Gokhale, an economist with the Cleveland Federal Reserve and the American Enterprise Institute (AEI), and Kent Smetters, an economist at the Wharton School of the University of Pennsylvania, calculated in a recent, unpublished study about new methods of federal budget accounting.

What the number represents is the difference between all the government's future obligations -- mostly Medicare and Social Security payouts, which will explode when Baby Boomers start retiring in large numbers -- and its future revenue.

The implications of the study, which looks beyond the 75-year window the government currently uses for its estimates, could be staggering -- meaning that if the federal government wants to meet its Medicare and Social Security obligations in coming years, it would have to raise taxes, slash federal spending, or both.

If the problems aren't corrected, the study shows, the already huge projected shortfall could grow to $54 trillion by 2008 and keep getting larger every year thereafter.

"The problem is pretty urgent, and we don't have any time to start dealing with these problems," Gokhale told CNN/Money. "If we do nothing today, the cost of postponing action grows over time."

A grain of salt

It's important to keep in mind, however, that the $44.2 trillion is a theoretical number -- the White House, which chooses to project just 75 years into the future, sees an $18 trillion shortfall -- and any number that goes too far into the future is likely to be fraught with uncertainty.

Medicare benefits, for example, might not be as burdensome if the costs of health care suddenly plunge, and Social Security might not be such a burden if people work longer before retiring.

"What they've done is thoughtful, analytically sound and numerically cautious ... but they haven't put in the huge caveat about the range of uncertainty," said Richard Kogan, a senior fellow at the Center for Budget and Policy Priorities, a Washington think tank. "It's so large that we can't know if the problem is twice as great or a quarter as great as what they're saying."

And even if the $44.2 trillion figure is correct, it won't come due all at once -- there likely will be time to take incremental steps early to deal with it, Kogan added.

Nevertheless, even the White House admits the shortfall will become a real problem soon, in 10 years or less, in fact, when Baby Boomers start retiring, putting more of a strain on the Social Security and Medicare systems. The White House has said raising taxes 7.1 percent would fix the problem forever -- but a tax increase of that size is also highly likely to sink the economy.

Policy makers take notice

Gokhale asserts that fixing the massive shortfall he projects -- assuming the government chooses not to cut Social Security and Medicare benefits -- soon will force the government to pick from an array of even nastier poisons, including:

  • boosting individual and corporate taxes 69 percent
  • raising payroll taxes 95 percent
  • cutting non-Social Security and non-Medicare spending 56 percent
  • eliminating all other federal government spending
  • or some combination of each of these four measures

And while you can bet your retirement money that no Congress will ever take such dramatic steps, policy makers are nonetheless apparently sitting up and taking notice of the of the worst-case possibilities.

The Financial Times reported Thursday that the Gokhale-Smetters study was commissioned by Paul O'Neill when he was treasury secretary, and Smetters told the paper that White House advisers Lawrence Lindsey and Mitch Daniels read and were "very engaged" with it.

The Treasury Department Thursday denied having anything to do with the study, which is likely to be published by the AEI in July, and Gokhale said it was meant only to be a "talk piece."

But the Social Security Administration has started using the Gokhale-Smetters accounting method to project future deficits, and Gokhale is hopeful the rest of the government soon will follow suit -- unlike some analysts, he thinks his longer-range view is better, since it takes into account all possible spending by the government.

"We need these measures because we need to be able to evaluate the trade-offs involved and the alternative methods of solving the problem," Gokhale said. "To do that, we have to take the full fiscal imbalance into account."

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