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Entitlements Digging U.S. Fiscal Grave

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Social Security, Medicare unsustainable.

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Editor's Note: The following submission was written by Minyan Rolfe Winkler, who runs the blog optionARMageddon.


There is a crisis confronting America. Larger than war, more dangerous than Osama, more hazardous than recession, it threatens America's status as the world's preeminent economic superpower. If we fail to address this crisis, we face potentially "catastrophic consequences."

The problem, which I discussed with Government Accountability Office Chief David Walker, is the fiscal crisis the US faces with Medicare and Social Security.

Walker is leading a Fiscal Wake Up Tour to educate America about the crisis and in March he'll leave GAO to head a new foundation dedicated to solving it. More on that later; first his numbers.

Most know that Social Security's finances are troubled. Few know that Medicare's shortfall is five times larger. If not reformed, the two behemoth entitlements could bankrupt the US.

Medicare and Social Security are funded, not by trust funds, but by transfers from workers to retirees. Right now, there are more than enough workers to fund retiree benefits. But as the baby boomers age and as health care costs inflate, America's future obligations will increase substantially.

Walker has calculated those obligations.

To pay future Medicare bills, the federal government would, today, need to set aside $34 trillion dollars. To pay future Social Security bills the US would need another $6.8 trillion. How much has the government set aside to meet these obligations? $0.

Put another way, to help the federal government pay its bills over the next few decades, every person in America would, today, have to give Uncle Sam $170,000. We can't expect children and the unemployed to contribute, so what would each full-time worker have to fork over? $400,000.

The longer we wait to reform them, the larger the contribution per worker will have to be.

Americans don't have that kind of money. Walker notes that at every level of society Americans are "addicted to debt." The economy consumes billions more than it produces; the government spends billions more than it receives in taxes; and individual savings rates are near zero.

A straight-talking non-partisan whose findings are supported by think-tanks across the political spectrum, Walker compares America's situation to the waning days of the Roman Republic, which collapsed under the weight of its fiscal and military obligations.

And Walker isn't the only impartial observer that sees the US economic supremacy at risk. Moody's recently said that if we fail to reform runaway entitlements, US debt could be downgraded within 10 years. That may be a prelude to default.

"The worst case scenario," Walker says, "is that we could suffer the same fate as Argentina." The Argentine government defaulted in 2002 after running up massive debts during the 90s. Foreign capital fled the country, the banking system collapsed, inflation hit 80%, and unemployment reached 25% as the economy sank into a depression.

Yet not only are politicians refusing to speak out against ballooning entitlements, they're making the problem worse.

In 2003, Republicans passed the Medicare drug benefit, which boosted US future obligations $8.4 trillion. For their part, Democratic candidates propose "universal" health care, which could increase our liabilities even more.

But perhaps the biggest obstacle to reform--and the reason politicians won't confront the issue--is the American people, who have grown "self-centered", feeling entitled to ever-increasing benefits, Walker argues.

Private equity mogul and ex-Commerce Secretary Pete Peterson sums up the crisis as "undeniable, unsustainable and virtually untouchable politically." To confront this and other sustainability issues, he's donating a billion dollars to a new foundation that will bear his name. And he's hiring Walker to lead the charge.

Hopefully, the foundation's first proposal will be to reduce promised benefits. The alternative, raising taxes, makes no sense with the economy headed for a protracted recession. New taxes to pay growing entitlement benefits will only exacerbate the economy's problems by discouraging job growth and investment.

Just as Detroit can't finance runaway union health costs by charging more for its cars, the government can't finance its way out of the entitlements crisis with higher taxes. Investors and employers will increasingly shun the US economy just as consumers shun higher-priced American autos.

The first step to solving any problem is acknowledging that you have one. Walker's numbers force us to do that.

His next step will be to convince Americans that they must sacrifice in order to ensure a fiscally sustainable future. For the US to thrive in the 21st century, we have no choice.


Rolfe Winkler, CFA, publishes www.OptionARMageddon.com out of New York. Formerly an Internet and Media analyst at hedge fund Matador Capital in Florida, he's now the Controller/Business Analyst at Fotolog, Inc. He is a graduate of the Economics Dept. at The University of Chicago (honors). Comments to rolfewinkler@yahoo.com.
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