Americans have a looming obligated deficit of $63.6 trillion--a figure which is more than what the entire world produces (Gross Domestic Product-GDP; $61.1 trillion), and about four times higher than all the products we produce in the United States (GDP; $14.6 trillion) in a year. This is like having a mortgage that is four times what you earn, except that you do not have a house to show for it.
These numbers are so large that only a few people think they understand them. Some argue that increasing cost in health care spending and Social Security are the main culprits of this obligated debt. Others point to the growing deficits that we build annually into our federal budget. This year we have added an additional $1.3 trillion to the deficit. If, as some economists predict, our current ailing economy will continue to suffer stresses, then it is becoming more important to question this legacy we are leaving our children and grandchildren.
The two largest federal spending obligations are Social Security and Medicare. We euphemistically refer to Social Security as a “pay-as-you-go” system. This means that money that we pay today goes to support the benefits of retirees. Any surplus is spent by the government (for which we get IOUs and treasury bonds). Unlike other countries who invest their surplus, the U.S. government spends it. This year our annual Social Security surpluses will disappear, which means that not only do we have to contend with a deficit every year (with no surplus money coming in from Social Security), but we have to find money to start paying retirees from other sources other than Social Security contributions.
The other part of this double jeopardy is Medicare. By 2007, total spending on health care in the United States was $2.3 trillion or $7,600 per person. The percentage of GDP that is spent on national health is projected to continue to increase (from 5.2 percent in 1960 to 20 percent in 2016), which translates to $4.2 trillion. Rising health care costs are an emergent issue especially for the United States, unlike other countries which seem to have essentially contained costs.
The latest report by the Social Security Trustees in 2008 summarized the situation in stark terms by stating that, “Projected long run program costs are not sustainable under current financing arrangements. Social Security's current annual surpluses of tax income over expenditures will begin to decline in 2011 and then turn into rapidly growing deficits as the baby boom generation retires. Medicare's financial status is even worse.” Despite this overwhelming evidence, Americans are becoming more optimistic about Social Security’s and Medicare’s future.
We need to narrow this gap between reality and wishful thinking. Our failing economy will compel us to examine our practices around borrowing. Individually we need to educate younger people about how to use money, to become fiscally aware. Since they will bear the cost of our spending spree.
The argument is not that it is too costly to borrow, but that it is too costly to borrow without planning how our children and grandchildren are going to pay it back.
Mario Garrett PhD is a professor of gerontology at San Diego State University. He can be reached at mariusgarrett@yahoo.com © Mario Garrett 2010
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