What Makes Us Think They Will Pay?

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Notwithstanding all the political rhetoric in DC from both the President and members of Congress, responsible US budget scenarios that reflect current spending commitments and revenue streams show two things. First, the federal government’s share of GDP (not including interest payments on outstanding debt) is on track to hit 25% by 2016 and 30% by 2065 or so; while revenues, given current tax structures, will peak out at less than 20% of GDP. Second, the main source of this increase is our federal commitments to provide healthcare to our citizenry. By 2084, federal healthcare costs as a percentage of GDP will be equal to what total government spending is today as a percentage of GDP. In other words, unless we do something, the deficit will continue to increase, and it will become ever clearer that we are on an unsustainable path.

It is also important not to be fooled by Washington talk about cutting the deficit. Politicians are not talking about cutting the deficit. They are talking about cutting increases in the deficit from levels they might otherwise have reached. Current projections have the deficit increasing by about $10 trillion over the next ten years, which dwarfs the one to two trillion dollars of spending cuts that are being bandied about in current discussions in DC.

Another group that haven’t distinguished themselves in the budget discussions are our senior citizens and their main lobbying group, the AARP. They have steadfastly stonewalled any reforms to retirement and healthcare benefits, even when those reforms are prospective and would not reduce benefits to current retirees. The fact is that Social Security is not our major budget buster, according to the OMB projections. Social Security outlays are essentially flat through 2082. What aren’t flat are payments into Social Security, which are de facto, earmarked tax receipts targeted to cover needed disbursements. Forget the so-called Social Security Trust Fund – it doesn’t exist. All it contains is Treasury debt, which can only be converted into cash by diverting current taxpayer receipts from other programs or through increased borrowing by the government, which would only deepen our deficit hole.

So who is going to pay for all the entitlements that have been put into place? When speaking to groups of senior citizens, I ask them if they would knowingly saddle their children and grandchildren with huge amounts of debt to cover services that they, the elderly, have voted for themselves in ill-designed schemes? Almost universally, the response is no! But that is exactly what we have done and are continuing to do to our children and grandchildren, most of whom are too young to vote or aren’t even born yet. Those tax dollars I mentioned that are needed to cover mandated Social Security and medical care payments are dollars taken from the pockets of the young. They are not dollars that we, the elderly, have contributed in the past that are sitting in some lockbox on which we now have a legitimate claim.

We are being told that we don’t have to choose between the interests of the young and the needs of the elderly. But those assertions are not correct. Our children are the ones who will pay, since they are the ones who will be taxed to cover benefits payments. Their disposable incomes will be reduced, and the growth potential of the economy will also be reduced because of the burdens of increased government. The answer also doesn’t lie in taxing the income of the rich or confiscating their wealth. There simply isn’t enough of either to make a meaningful dent in the revenue shortfall. Moreover, history has shown that the rich can be extremely successful in sheltering assets and income, and they can afford the costs of doing so.

Our children are the ones who will ultimately control the purse strings and will have to choose whether to meet the commitments placed upon them by past generations, or meet the needs of their own families. I think that choice is clear, and it’s the one that I would make as well, were I in their shoes. From the perspective of any parent, the children come first. And those of us who naively voted to grant ourselves benefits will be left wanting, and rightly so.

Source: Cumberland Advisors Commentary

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About Bob Eisenbeis