Budget Balancers Face Deficit Shock in 2003

It is the “dirty little secret” you will not hear voiced in the noisy debate over balancing the budget by the year 2002--the nettlesome little matter of 2003.

At that point, or a few years later, a new wave of red ink is projected to begin splashing across the federal balance sheets.

After about 2008, when the baby boom generation begins to retire, spending for Social Security and Medicare will build to a torrent. Neither President Clinton nor congressional Republicans, who remain at loggerheads over a formula for eliminating the deficit by 2002, have put anything on the table that would transform that outlook.

Simple arithmetic dictates that the more time that elapses before change is made, the harsher the solutions will have to be. Phasing in changes over a period of years would cause less disruption than imposing substantial spending cuts and tax increases all at once.

“It’s the most important part of the budget problem, and it’s the least talked about in the current debate,” said Sen. Bob Kerrey (D-Neb.), who chaired a presidential commission on the staggering cost pressures over the horizon.

By not dealing with the threat now, added Kerrey, whose commission’s findings were widely ignored, “an opportunity is being squandered and you’ll never get it back.”

On top of that, the separate budget-balancing plans of the White House and congressional Republicans are heavily “back-loaded.” The White House would postpone more than half the spending curbs, in the form of undefined savings in domestic spending, until 2001. The Republicans, economists say, would do little better.

Toss in some budget-busters--a few natural disasters, a crisis such as the savings and loan debacle, unforeseen social problems or military adventures--and the budget picture is gloomier still.

Boston University economist Laurence J. Kotlikoff calls the unresolved budget debate a “charade.” Future generations face a staggering financial burden unless much more sweeping reforms are enacted.

“It’s the dirty little secret no one wants to talk about in Washington,” he said. “The politicians are just dancing around reality and looking at the short term.”

A single, overarching truth about the long-term budget picture overshadows all others: the aging of 76 million baby boomers after the turn of the century.

Once the post-World War II generation begins to retire, such programs as Medicare and Social Security will face unprecedented cost pressures, threatening increasingly bizarre distortions in the budget and the economy.

Economist Herbert Stein recently warned of deficits in the years after 2002 that equal 20% of the whole economy--more than $1 trillion a year--unless preventive measures are taken. By comparison, today’s deficits ($162 billion in 1995) are puny and not likely to total much more than 2.5% of the economy for the next few years, even if politicians fail to reach a budget accord.

Budget projections this far into the future are more art than science, and the future may prove less bleak if, for example, economic growth exceeds Stein’s expectations. “There’s 1 chance in 3 we’ll be off by $150 billion,” conceded one Congressional Budget Office analyst. “And that’s just from the economic errors alone.”

In Stein’s nightmare scenario, the national debt could swallow up so much private savings that living standards would sag.

“This would threaten to go beyond slowing down the growth of incomes and actually reduce incomes . . . “ Stein wrote in the Wall Street Journal. “This situation could not go on.”

Stopping it would require the nation to choose from an unpalatable menu of benefit restrictions and tax increases--options that political leaders have kept off the bargaining table for now. But if the issues remain obscure today, they seem destined to grow in urgency tomorrow. Among the reasons:

* Americans already face a mind-boggling $14 trillion in unfunded future obligations for Medicare, Social Security and government employee retirement programs, according to Michael Tanner, director of health and welfare studies at the libertarian Cato Institute. In other words, no one knows exactly where this money will come from.

* The annual bill for interest on the national debt and the cost of Social Security, Medicare and other mandatory spending programs will continue to grow under Republican and Democratic budget proposals. This will relentlessly squeeze all other programs.

* The population of retirees will jump 30% in the first decade of the baby boom’s retirement, while the nation’s overall population goes up just 2%, according to the Kerrey Commission on Entitlement and Tax Reform. There will be just three workers to support every American of retirement age, down from five workers per retiree now.

Without more reforms, children born after 1995 will pay as much as 84 cents in taxes for every dollar earned, Kotlikoff projects. (By contrast, he computes, today’s working adults will typically pay 33 cents on the dollar over their lifetimes.)

Neither the Republican nor the Democratic plans significantly alter the outlook, although Kotlikoff believes that the GOP proposal would leave less of a burden on future generations than the administration’s because it seeks greater savings in federal benefit programs.

“And the reality is that even the Republican budget would cut too little too late,” he said.

Not everyone agrees. For all the limits of current proposals, even some fiscal conservatives say that balancing the budget by 2002 would represent a vital, first assault on the bigger problem.

It is “a necessary platform from which you go on to attack the larger issues,” said Martha Phillips, executive director of the anti-deficit Concord Coalition. She admitted, however, that she worries about the “long-term time bomb.”

Hardly anyone would disagree with Tanner, who said: “You can’t meet all the obligations that are out there, barring some sort of miracle.” That, he said, leaves an uncomfortable choice: “Do you raise taxes on young people or do you cut benefits for old people?”

That question is the Bermuda Triangle of politics, and Kerrey’s panel steered clear of it in its January report. Instead, it offered a list of options--higher Medicare deductibles, higher payroll taxes for Medicare and Social Security, reduced cost-of-living increases for federal benefits and limits on tax deductions for charitable contributions and mortgage interest--that give a flavor of the medicine that may be in store.