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by Matthew Continetti
05/25/2009, Volume 014, Issue 34

We all love scary stories, and the 2009 report from the trustees of Social Security and Medicare is one of the most frightening that’s been published in years. Unfortunately, it’s nonfiction.

The trustees conclude that a combination of lavish benefits, an aging population, and a moribund economy has brought the United States’s social insurance system close to bankruptcy. Medicare is already running a deficit, and the trustees say that it will be totally out of money by 2017. Social Security will be in the red as soon as 2016. That’s a problem not only for Social Security. It’s a problem for the federal budget.

Why? Because our representatives in Congress–all of whom qualify for the Arthur Andersen Award in Creative Accounting–currently use the Social Security surplus to reduce the government’s overall annual budget deficit. Despite that surplus, this year’s overall deficit is already at $1.8 trillion. Imagine what it will be when Social Security has to borrow money to send Nana her check.

The saying goes that the federal government is nothing more than a giant insurance company with a side business in defense. Most federal expenditures, after all, go to just four things: Social Security, Medicare and Medicaid, interest on the national debt, and the Pentagon. But here’s the bad news: The insurance company the government most closely resembles is AIG.

Deficit spending is “unsustainable,” President Obama said last week. “We can’t keep on just borrowing from China.” He’s right. But talk is cheap. President Obama says Social Security needs to be reformed. Great.
Where’s his plan? Obama says Medicare’s deficit is a problem. Too true. Why isn’t he doing anything to solve it?

The president acknowledges that Medicare is on the verge of crisis. He says the only way to prevent the crisis is to restrain overall health care spending. And how will we do that? He hasn’t said. But he’s given some hints. Step one: tax employer-provided health care. In this instance at least, the president understands that when you tax something, you get less of it. Step two is determining, through “comparative effectiveness research,” which health treatments the government will pay for. Our guess is, the cheap ones.

The president will deserve praise if he’s able to do something every other American president has not: reduce the growth of Medicare. We think that’s unlikely. Obama faces the same problem that stymied his predecessors. There simply isn’t a political constituency for reducing the amount of a public good (health care spending) provided to a powerful political lobby (retirees). And indeed, Obama promises to make the problem worse, since his universal health care program would increase the amount of outstanding government obligations paid for by money that the government simply doesn’t have.

Obama’s budgets promise huge spending and deficits all the way to the horizon. The debt is unsustainable. To pay back the government’s creditors, America would have to undergo an economic growth spurt similar to the post-World War II boom. But even Dr. Pangloss would think such prosperity is unlikely in the near future. Meanwhile, bizarrely and perversely, Obama and the Democrats on Capitol Hill say that the only way to fix America’s spending problem–we are not making this up–is to spend more money. More on energy. Health care. Education. The three pillars of the president’s “new foundation.” Don’t worry about the cost, Obama says. The rich guy at the other table will pick up the bill.

But that’s a fantasy, too. Allowing the Bush tax cuts to expire will raise some revenue, but not nearly enough to fill the fiscal hole. You’d have to return to FDR- or Eisenhower-level confiscatory rates to make an impact, but that still wouldn’t do enough–though it would help the folks betting against the Dow, as well as banks in Switzerland and the Cayman Islands. If nothing is done to cap spending, raise the retirement age, and index benefits to inflation and income, then taxes will have to be raised across the board. On Warren Buffett, on Joe the Plumber, on Harriet Homemaker, and everyone else who purchases a good, receives an income, accrues interest, owns property, or earns dividends. The only other option is an inflation that will depreciate the currency and destroy middle-class savings.

Obama likes to talk about a new era of responsibility, but he has a curious understanding of the concept. When you are in debt, responsibility is spending less and saving more. Imposing discipline. Budgeting for the future. It is not borrowing from Matthew to pay Mark while taxing Luke to weatherize John’s house.

Then again, based on our reading of the trustees’ report, maybe it makes sense for the president to duck the hard choices. Obama talks about the “day of reckoning,” but right now it looks as though that day won’t arrive before 2017. He’ll be safely out of office.

Lucky guy. His successors won’t be.

–Matthew Continetti

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