No mention of fiscal

gap estimated as high

as $72 trillion

77 million-strong Baby Boom

generation will begin to retire in

just four years. The economic

consequences of this fact — as

scary as they are foreseeable —

are all but ignored by President

Bush and Democratic

challenger John Kerry, who

discuss just about everything

but the biggest fiscal challenge

of modern times.

Yet whoever wins the 2004 race

will become the first U.S.

president to confront what

sober-minded experts across the

political spectrum describe as

an impending “fiscal

catastrophe” lying right around

the corner.

Astronomical federal debt,

coming due as the Baby Boom

generation collects Medicare,

Medicaid and Social Security, is

enormous enough to swamp the

promises both candidates are

making to voters, whether for

tax cuts, health care, 40,000

more troops or anything else.

“Chilling” is the word U.S.

Comptroller General David

Walker uses to describe the

budget outlook.

“The long-term budget

projections are just horrifying,”

added Leonard Burman, codirector

of tax policy for the

Urban Institute. “I’ve got four

children and it really disturbs

me. I just think it’s irresponsible

what we’re doing to them.”

What these numbers portend

are crippling tax increases on

workers, slashed benefits for

retirees, gutted budgets for

homeland security, highways,

research and everything else,

and an economic decline or a

financial collapse that

devastates the middle class, as

happened recently in debtstrapped

Argentina. Eventually,

analysts insist, someone —

today’s children or tomorrow’s

elderly or both — will pay this

debt.

Traditional budget measures

used by politicians and the press

give what Walker and many

others call a highly misleading

view of the U.S. debt. These

focus on publicly held debt

already incurred, now at $4.5

trillion, or 10-year budget

forecasts like the one released

last week by the Congressional

Budget Office showing a record

$422 billion deficit this year and

a $2.3 trillion 10- year deficit.

But these figures, worrisome

enough, are deceptive because

they ignore future liabilities

such as Social Security and

Medicare payments to the Baby

Boomers. An array of

government and private analysts

put the actual U.S. “fiscal gap,”

which means all future receipts

minus all future obligations, at

$40 trillion (Government

Accountability Office) to $72

trillion (Social Security Board

of Trustees).

These are not sums, but

present-value figures, heavily

discounted to show in today’s

dollars what it would cost to

pay off the debt immediately.

The International Monetary

Fund estimates the gap at $47

trillion, the Brookings

Institution at $60 trillion.

“To give you idea how big the

problem is,” said Laurence

Kotlikoff, economics chairman

at Boston University, who has

written extensively on the

subject, to close a $51 trillion

fiscal gap, “you’d have to have

an immediate and permanent 78

percent hike in the federal

income tax.”

These obligations are not

imaginary. And unlike the 1980s

and 1990s, economic growth

cannot bail out the government

because the Baby Boom

retirement is at hand. Those

born in 1946 will reach age 62

in 2008, allowing them to take

early retirement and receive

Social Security benefits.

“It’s a number that’s so large

that people find it implausible,

and so they don’t think about

it,” said Alan Auerbach, a UC

Berkeley economist who studies

the issue and consults for the

Kerry campaign. “But it’s based

simply on the projections we

have for Social Security and

Medicare. People aren’t making

these numbers up.”

A pathbreaking study by

Jagadeesh Gokhale of the

Federal Reserve Bank of

Cleveland and Kent Smetters, a

former deputy assistant

secretary at the Treasury —

commissioned by former

Treasury Secretary Paul O’Neill

— estimated a $44 trillion fiscal

gap. It laid out a few painful

options on how to meet the

liabilities:

— More than double the payroll

tax, immediately and forever,

from 15.3 percent of wages to

nearly 32 percent;

— Raise income taxes by twothirds,

immediately and forever;

— Cut Social Security and

Medicare benefits by 45

percent, immediately and

forever;

— Or eliminate forever all

discretionary spending, which

includes the military, homeland

security, highways, courts,

national parks and most of what

the federal government does

outside of the transfer of

payments to the elderly.

Such corrective actions grow

more severe each year. Waiting

just until 2008, the end of the

next presidency, would mean

raising the payroll tax to 33. 5

percent instead of 32 percent,

the study found.

Gokhale said that fresh numbers

from the Medicare trustees

show the fiscal gap has since

grown to $72 trillion, $10

trillion of that for Social

Security and an astonishing $62

trillion for Medicare, the

government health care

program for the elderly.

“The long-term picture is pretty

bad,” Gokhale said.

These numbers are seldom

discussed, least of all in the

2004 presidential race.

Ironically, as the Baby Boom

retirement has neared — and

the remedies grow more painful

— political discussion has

faded. Gone is Ross Perot’s

anti-deficit crusade. Gone is

Newt Gingrich’s call for

Medicare restraint. Gone is Al

Gore’s “lockbox” for the Social

Security surplus.

Instead, Kerry and Bush

promise only to halve the

current deficit in four years —

“both (of them) relying on

pretty imaginative accounting to

get there” said Burman — while

promising more spending and

more tax cuts.

Yet today’s deficit is a tiny

fraction of the government’s

actual liabilities, which are so

daunting they promise to make

Bush’s tax cuts a distant

memory and Kerry’s health care

plan a fantasy.

While Bush and Kerry propose

to address parts of the problem,

“the numbers don’t add up on

either side,” Walker said.

Medicare makes up the bulk of

these liabilities, driven mainly

by the expanding elderly

population and rapidly rising

health costs. Social Security,

more often discussed as a

looming problem, actually

accounts for far less in future

debt.

While Congress squabbles over

whether the administration hid

the new prescription drug

benefit’s 10-year cost —

pegged by the White House at

$534 billion versus CBO’s $395

billion — the actual liability

incurred by the new drug

benefit is estimated at $8 trillion

to $12 trillion.

Kerry and Democrats call the

drug benefit inadequate. They

would do little to restrain

Medicare costs other than

allowing the importation of

price- controlled drugs from

Canada.

Bush and Republicans added

the drug benefit along with

costly subsidies to providers.

Even optimists do not expect

their modest market reforms to

cut costs.

Kerry has promised not to cut

Social Security. “I will not cut

benefits,” he said recently. “I

will not raise the retirement

age.”

Democrats generally cite “trust

fund” numbers that show Social

Security - - and Medicare to a

lesser extent — remaining

solvent for decades, even

though government officials

repeatedly call the numbers an

accounting fiction. CBO

director Douglas Holzt-Eakin

last week said the funds contain

nothing but “electronic chits”

that measure government

obligations to itself.

Bush proposes adding private

accounts to Social Security for

younger workers, which could

reduce future government

obligations, but would do so by

diverting a portion of the

payroll tax, adding $1 trillion to

the short-term deficit. That

might have been feasible when

Bush took office in 2000 facing

a projected $5.6 trillion surplus,

but the surplus is gone. Similar

plans in Congress that instead

rely more on benefit cuts have

gone nowhere.

“The country’s absolutely

broke, and both Bush and Kerry

are being irresponsible in not

addressing this problem,”

Kotlikoff said. “This

administration and previous

administrations have set us up

for a major financial crisis on

the order of what Argentina

experienced a couple of years

ago.”

If this sounds far-fetched,

former Bush Treasury

Undersecretary Peter Fisher and

former Clinton Treasury

Secretary Robert Rubin both

alluded to such a scenario at a

June budget forum in

Washington.

“Having been involved in

markets for a long, long time,”

Rubin said, “I can tell you these

things can change unexpectedly

and without warning,” referring

to potential financial market

reactions to the U.S. fiscal

position.

Fisher warned of a “pivot

point” when “the collective

wisdom of bond traders thinks

that the deficit horizon has

turned,” adding, “Both Bob and

I are nervous.”

The world has seen fiscal

imbalances of this sort before,

in Asia and Russia in the late

1990s and more recently in

South America. Such financial

panics can be triggered by any

number of events — a flight

from Treasury bonds by the

foreigners who buy much of the

U.S. debt, for example — if

investors’ views of the market,

which are focused on the short

term, suddenly change.

“If you look at financial crises,

they occur seemingly

overnight,” said Kotlikoff.

“More and more pieces of straw

drop on the camel’s back, and

all of a sudden, the camel

collapses. ... Nobody knew

exactly what day Argentina was

going to go south or exactly

what day Russia was going to

default. The timing is up for

grabs.”

But early signs of a problem are

now appearing, analysts said,

starting with the mounting

deficits under Bush caused not

just by the recession and

terrorist attacks, but also by

enormous spending increases

and tax cuts. The brief window

of surpluses that appeared

during the late 1990s economic

boom offered a chance to

address long-range liabilities,

but those surpluses now are

gone.

“Maybe the public doesn’t want

to hear it,” Kotlikoff said.

“Maybe politicians think ... the

American public can’t

understand the truth or hear the

truth or bear the truth. I think

this is garbage. I think that

people care about their kids and

grandchildren and need to know

the dangers facing them — and

us.”