“A billion here, a billion there - pretty soon it adds up to real money,” Sen. Everett Dirksen famously observed. Mr. Dirksen, the late Republican fiscal conservative, held the Illinois Senate seat Barack Obama later occupied.
To meet the standards of Monday’s “fiscal responsibility summit” Mr. Obama hosted at the White House, Mr. Dirksen’s quip would have to be adjusted by several orders of magnitude. Even “a trillion here, a trillion there” would not suffice.
According to the latest Social Security and Medicare trustees’ reports, the federal government needed to deposit $43 trillion in interest-bearing accounts on Jan. 1, 2008, in order to generate the funds to meet its Social Security and Medicare commitments over the next 75 years. That’s $43 trillion the government did not have.
“The situation is absolutely critical,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a bipartisan budget group that advocates fiscal discipline. “We cannot have a stable economy over the long term without addressing the long-range fiscal imbalances.”
The structural fiscal imbalances were daunting before the economy began deteriorating rapidly during the second half of 2008. The problems have been getting much worse since then.
For example, the 2008 Financial Report of the United States government, issued by the Treasury Department in December, projected that publicly held debt would rise from 41 percent of gross domestic product (GDP) in 2008 to 50 percent by 2017.
“Without changes to [Social Security, Medicare and Medicaid], publicly held debt may be more than 110 percent by 2032, surpassing the World War II peak of 109 percent, and by 2080, publicly held debt may exceed 600 percent of GDP,” the report said.
This report was issued the month before the Congressional Budget Office (CBO) estimated that the 2008 budget deficit would reach $1.2 trillion, or 8.3 percent of GDP, a postwar record. Then came the multiyear $800 billion stimulus plan, which will likely keep annual budget deficits above the $1 trillion level for several years.
“Because rapidly rising debt threatens our credibility as sound fiscal managers, we do not have the luxury of waiting until the economy recovers before taking actions to bring down projected future deficits,” Alice Rivlin told the House Budget Committee late last month. Ms. Rivlin, who was the first CBO director, later became the White House budget director in the Clinton administration and the vice chairman of the Federal Reserve Board.
This is no longer a theoretical exercise. In a recent paper examining the fiscal crisis in 2009 and beyond, two economists - Alan Auerbach of the University of California at Berkeley, and William Gale of the Brookings Institution - detected “a clearly discernable uptick in the perceived likelihood of default on five-year U.S. Treasury debt, a notion that was virtually unthinkable in the past.”
The math is simple, experts say. “The only way to address this fiscal crisis is to cut spending or raise taxes,” said Diane Lim Rogers, chief economist of the Concord Coalition, a nonpartisan, grass-roots budget watchdog group.
Compared with Medicare, “fixing Social Security is a relatively easy technical problem,” said Ms. Rivlin. Yet, former President George W. Bush’s Social Security reform efforts went nowhere in 2005.
“Vigorous action should also be taken to make Medicare more cost effective and slow the rate of growth of Medicare spending,” Ms. Rivlin said.
This is trickier than it sounds. When a Republican-controlled Congress attempted to slow the growth rate of Medicare in 1995, a titanic political battle erupted, culminating in a brief shutdown of the federal government.
“Today, budget deficits are justified,” said Ms. Rogers. “The tricky part is handling the transition from injecting stimulus today to pursuing the exact opposite approach.”
That will require increasing national saving by dramatically reducing the budget deficit, she said.