One of the messages of the tragic events following Katrina was the underscore of the finite nature of America’s resources. Policy makers gambled that the allocation of monies away from needed public works projects on the New Orleans levees would remain hidden from public consciousness and the conversion of FEMA into a “safe house” for political cronies after the hemorrhaging of seasoned FEMA agency personnel following 9/11 would go unnoticed. They lost.
There are other storms on the horizon – not all of them forces of nature, but some potentially far more devastating to the national treasury and the national psyche. In their book, The Coming Generational Storm: What You Need to Know About America’s Economic Future, (MIT Press, Cambridge 2004), Lawrence J. Katlikoff and Scott Burns lucidly and persuasively analyze the “fiscal gap,” the gulf in present value between our government’s future receipts and expenditures assuming the same tax rates in place as at present. They calculate the gap at year 2050 as being approximately 45 trillion dollars (51 trillion with the expected 6 trillion dollar impact of the Medicare Prescription Drug benefit adopted by Congress last year). To place the number in perspective it is over 11 times the fiscal debt as it stood in 2004; it is four times all of the annual economic output of the United States. It substantially exceeds the forty trillion dollar collective net worth of all of the people living in the United States. The Bush tax cuts, if made as recommended, will represent about 9 trillion dollars of the final gap. This is even without consideration of the hurricane Katrina or other future catastrophic events.
In order to match expenditures with revenues by Year 2050 we would have to engineer an immediate 69% increase in general taxes and a 95% increase in payroll taxes. Of course the debt is never likely to be paid off entirely, but how much of a load can future generations afford to bear without inciting outright rebellion?
The authors predict that the most likely response of the government will be to evade the impact of the burgeoning debt through inflationary fiscal policies. In other words we will be better off investing in hard assets whose values are likely to be inflation protected.
The authors offer their own plan to save Medicare and Social Security. To save Medicare, they recommend the replacement of the current fee for service Medicare reimbursement system, with an annual, patient specific voucher that are weighted to reflect the probable future medical needs of each patient.
The vouchers would purchase a stipulated basic coverage plus prescription drugs. Insurers would be free to market additional coverage. The government would set voucher amounts to limit per capita Medicare growth to that of real wages. They recommend including Medicaid in the program; roll back the Bush tax cuts, limit Federal discretionary spending to 6% of Gross National Product (the ratio extant when George W. Bush took office).
They also recommend replacement of Social Security with a “Personal Security System” (“PSS”). PSS would eliminate accrual of additional Social Security Retirement benefits. Current retirees and current workers would receive accrued benefits. Social Security Old Age Insurance payable tax would be eliminated and replaced with mandatory compulsory contributions to PSS accounts. A new federal retail sales tax would be installed to pay off accrued retirement benefits under Social Security. The government would make PSS contributions on behalf of the disabled and un-employed. The government would match PSS contributions on a progressive basis. All PSS balances would be invested in a single, market weighted, global index fund of stocks, bonds and real estate. Between ages 57 and 67, workers’ PSS balances would be sold off and transformed into inflation protected pensions. If a worker dies before age 67 the remaining PSS balances would be distributed to his or her heirs.
While the authors’ plans seem well thought out and responsive, the public reaction to the administration’s to a blue smoke and mirrors, “painless” transition to a system of personally managed private accounts will probably drown any meaningful effort to reform health care delivery and social security for many years. Gold stocks and metals would seem to be the safer bet now.
