Recently an Amazon.com reviewer of my book The Power of Zero confidently asserted that we can solve all our nation’s impending financial problems by simply restructuring our entitlement programs. I’d like to offer herein a counter perspective. We’ve all known for years that our government has promised way more than it can afford to deliver. To honor the promises made for Social Security and Medicare alone, we’d have to have $42 trillion sitting in a bank account today earning treasury rates. David Walker, former comptroller general of the federal government argues this case convincingly in this 60 Minutesepisode from 2008.
But even if our nation’s politicians decided to cut our nation’s social programs, those cuts would have to be massive and immediate. As you can read in this CNN.Money article, in order to solve our fiscal problems without raising taxes, we would have to permanently cut spending by 35% or $1.2 trillion per year, starting today. Every year that goes by where we fail to cut spending at these levels, the national debt grows and makes higher taxes all the more inescapable. Can our politicians muster the fortitude to make these types of dramatic spending cuts that would alienate their constituencies and cost them their jobs?
Some argue that we can restructure entitlements and tax the rich and that will solve all our fiscal shortfalls. The problem is, even if we confiscated 100% of their income, we still wouldn’t have enough money to dig our way out of our debt hole. Where else will that money come from? According to this Forbes article, the government will have to broaden its tax base and raise taxes on the middle class.
Finally, even if you think that we can waive a magical wand and solve the entitlement program fiasco, you still have the problem of sharply higher interest rates in the short term. We are paying roughly the same amount to service our national debt today ($17.5 Trillion) as we did back in the year 2000 ($5.6 Trillion), about $250 Billion. The reason? Interest rates back then were 6.5% while today they’re below 2%. If interest rates were to go back to historically normal levels, the cost of servicing our national debt would balloon to nearly $1 Trillion. The likelihood of higher interest rates in the short term is a greater immediate threat to our fiscal solvency than the foundering of our social programs in the mid- to long-term. See this video for a good explanation of the ongoing costs of servicing our debts in a rising interest rate environment.
In short, to justify investing in tax-deferred vehicles like 401(k)s and IRA’s, you have to believe that our federal government can somehow honor all of its fiscal obligations and liquidate its mounting debt without raising any additional revenue. You have to believe that taxes in the future will be the same or lower than they are today. In light of all the severe fiscal challenges facing our nation, is that really a good bet?