YORK (CNN/Money) - Many economists worry that
the U.S. federal budget deficit could approach
a record $500 billion this year.
however, have grasped that the fiscal problems
facing the United States could make an itty
bitty $500 billion deficit look like pocket
$44.2 trillion on for size.
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calculated in a recent, unpublished study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.
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
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
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.
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
grain of salt
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.
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.
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."
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.
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.
makers take notice
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:
individual and corporate taxes 69 percent
payroll taxes 95 percent
non-Social Security and non-Medicare spending
all other federal government spending
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
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.
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."
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
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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