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 May 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.
© 2003 Creators
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