You're On Your Own!

The following is an excerpt from a speech delivered in Naples, Florida, on February 18, 2009, at a Hillsdale College National Leadership Seminar by John C. Goodman, President of the National Center for Policy Analysis.

It should scare the hell out of you. And my read? Fellow Americans, we are all on our own...

When we get through the economic time that we're in right now, we're going to be confronted with an even bigger problem. The first of the Baby Boomers started signing up for early retirement under Social Security last year. Two years from now they will start signing up for Medicare. All told, 78 million people are going to stop working, stop paying taxes, stop paying into retirement programs, and start drawing benefits. The problem is, neither Social Security nor Medicare is ready for them. The federal government has made explicit and implicit promises to millions of people, but has put no money aside in order to keep those promises. Some of you may wonder where Bernie Madoff got the idea for his Ponzi scheme. Clearly he was studying federal entitlement policy.

Meanwhile, in the private sector, many employer-sponsored pension plans are not fully funded. Nor is the federal government insurance scheme behind those plans. We have a potential taxpayer liability of between 500 billion and one trillion dollars for those private pension plans, depending on the markets. And on top of that, roughly one-third of all Baby Boomers work for an employer who has promised post-retirement health care. As with the auto companies, almost none of that is funded either. Nor are most state and local post-retirement health benefit plans. Some California localities have already declared bankruptcy because of their employee retirement plans and the first of the Baby Boomers is still only 63 years old.

What all this means is that we're looking at a huge gap between what an entire generation thinks is going to happen during its retirement years and the funds that are there—or, more accurately, are not there—to make good on all those promises. Somebody is going to be really disappointed. Either the Baby Boomers are not going to have the retirement life that they expect or taxpayers are going to be hit with a tremendously huge bill. Or both.

The Mess We're In

How did this crisis come about? After all, the need to deal with risk is not a new human problem. From the beginning of time, people have faced the risks of growing old and outliving their assets, dying young without having provided for their dependents, becoming disabled and not being able to support themselves and their families, becoming ill and needing health care and not being able to afford it, or discovering that their skills are no longer needed in the job market. These risks are not new. What is new is how we deal with them.

Prior to the 20th century, we handled risks with the help of family and extended family. In the 19th century, by the time a child was nine years old, he was usually paying his own way in the household. In effect, children were their parents' retirement plan. But during the 20th century, families became smaller and more dispersed—thus less useful as insurance against risk. So people turned to government for help. In fact, the main reason why governments throughout the developed world have undergone such tremendous growth has been to insure middle class families against risks that they could not easily insure against on their own. This is why our government today is a major player in retirement, health care, disability and unemployment.

Government, however, has performed abysmally. It has spent money it doesn't have and made promises it can't keep, all on the backs of future taxpayers. The Trustees of Social Security estimate a current unfunded liability in excess of $100 trillion in 2009 dollars. This means that the federal government has promised more than $100 trillion over and above any taxes or premiums it expects to receive. In other words, for Social Security to be financially sound, the federal government should have $100 trillion—a sum of money six-and-a-half times the size of our entire economy—in the bank and earning interest right now. But it doesn't. And while many believe that Social Security represents our greatest entitlement problem, Medicare is six times larger in terms of unfunded obligations. These numbers are admittedly based on future projections. But consider the situation in this light: What if we asked the federal government to account for its obligations the same way the private sector is forced to account for its pensions? In other words, if the federal government suddenly closed down Social Security and Medicare, how much would be owed in terms of benefits already earned? The answer is $52 trillion, an amount several times the size of the U.S. economy.

What does this mean for the future? We know that Social Security and Medicare have been spending more than they are taking in for quite some time. As the Baby Boomers start retiring, this deficit is going to grow dramatically. In 2012, only three years from now, Social Security and Medicare will need one out of every ten general income tax dollars to make up for their combined deficits. By 2020—just eleven years down the road—the federal government will need one out of every four income tax dollars to pay for these programs. By 2030, the midpoint of the Baby Boomer retirement years, it will require one of every two income tax dollars. So it is clear that the federal government will be forced either to scale back everything else it's doing in a drastic way or raise taxes dramatically.

I have not even mentioned Medicaid, but it is almost as large a problem in this regard as Medicare. A recent forecast by the Congressional Budget Office—an economic forecasting agency that is controlled by the Democrats in Congress, not by some conservative private sector outfit—shows that Medicare and Medicaid alone are going to crowd out everything else the federal government is doing by mid-century. And that means everything—national defense, energy, education, the whole works. We'll only have health care. If, on the other hand, the government continues with everything else it is doing today and raises taxes to pay for Medicare and Medicaid, the Congressional Budget Office estimates that, by mid-century, a middle-income family will have to pay two-thirds of its income in taxes!