The job of the chairman of the Fed, it used to be said, was to take away the punch bowl just as the party got going good.
Last week, Alan Greenspan did his duty. He told Congress Social Security benefits must be cut for the baby boomers, to avoid taxes having to be raised on the Gen-Xers. Like Thelma and Louise, Social Security and Medicare are headed for the cliff.
For decades, our leaders, terrified of touching the “third rail” of American politics, have put off addressing the long-term crisis. Now, the monster has come into view.
In 2008, the first of the baby boomers, the largest population cohort in U.S. history, reaches 62 and eligibility for early retirement. By 2012, all boomers born in that first postwar year of 1946 reach full retirement age. Then, the wave will crest and crash.
From 2012 to 2031, all 77 million boomers will reach 67 and retire. Today’s big contributors to the Medicare and Social Security will become tomorrow’s biggest consumers of the trust fund money.
And the young folks entering the labor force as the boomers depart, more heavily minority and immigrant, will be unable to match the tax contributions of the boomers. As the man with the sandwich board in Times Square used to say, “Repent, the end is near.”
Soon, the surpluses in Medicare and Social Security will start to shrink. Then, they will vanish – unless benefit cuts are made or higher taxes imposed. The longer we wait to have the surgery done, the more painful and politically lethal it will be.
And as the surpluses in the trust funds disappear, the enormity of the fiscal deficit they have masked will be exposed. Then we shall no longer see as through a glass darkly the criminal indifference of this generation of Americans toward its children.
But Greenspan only touched on the emerging fiscal crisis.
The Bush prescription drug plan, costed out at $400 billion last fall, is now estimated to cost $540 billion. If Kerry replaces Bush, Democrats will make that program more generous and move toward universal health coverage. We are talking hundreds of billions more here.
This year’s deficit is already estimated at $521 billion, before the cost of Iraq is factored in. Unless the economy grows more rapidly, and more jobs are created, the deficit could break the peacetime record of 6 percent of GDP. And this is only the beginning of the bad news.
The merchandise trade deficit last year hit $550 billion. With the dollar sinking and the cost of oil and imports rising, that deficit, too, may soar. But if the dollar continues its fall, overseas investors in Treasury bonds and U.S. securities with fixed returns could dump these wasting assets.
This would force the Fed to raise interest rates to finance the deficit and prevent a run on the dollar. Interest on the U.S. national debt, one of the few budget bright spots, could soar again, adding scores of billions to future deficits.
Greenspan had other good news. There are two giant icebergs out there. Fannie Mae and Freddie Mac, “government sponsored enterprises” that hold three-fourths of all single-family-home mortgages, pose a “systemic risk.” Since between them they stand behind $4 trillion in mortgages, shakiness here could make the S & L disaster look a bookkeeping error.
Behind America’s fiscal crisis lies a social crisis, bred of the fact that the baby boomers are not the people their parents were.
Many came from big families but chose not have big families – to put off marriage, have fewer children and live the good life. Now, they are entering the autumn of their lives. But the next generation is smaller, less affluent. And because it contains more minority and immigrant poor, the new generation is less able to earn the incomes to provide the taxes to support the benefits the baby boomers expect in their golden years.
Generational conflict looms, and another problem. As we approach this decade’s end, the baby boomers who have been pouring scores of billions annually into pension plans, propelling the bull markets of the 1980s and 1990s, will begin to take out and draw down these funds.
How will that affect the Dow and the Nasdaq?
Europe, whose native-born are dying faster than ours, and whose health and pension benefits are more generous, are solving their problems three ways. Taking in millions of Muslim immigrants, painfully paring back their welfare states and free-riding on U.S. defense. If we do not bring the present and looming deficits down, we are headed the same way.
Prediction: The American empire will be the first luxury to be auctioned off in the great yard sale to save Social Security and Medicare.