Wharton prof: Real fiscal crisis is yet to come

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Wharton prof: Real fiscal crisis is yet to come

Monday, April 20th, 2009 | Social Security |

Knowledge @ Wharton - A Thought for Tax Day: The Real Fiscal Crisis Is Yet to Come:

Knowledge@Wharton: Do we have to dig ourselves out of the national debt before we can address Social Security or Medicare?

Smetters: No. In fact, ideally, it would be in some ways just the opposite. Social Security and Medicare are much bigger problems, and the longer that we delay those, the more those problems [will] snowball. In particular, every year that we delay reform on either of those programs it adds about another $2 trillion to the present value shortfalls of both programs. So just a one-year cost of delay is about the size of the record deficit that we’re going to have this year….

Knowledge@Wharton: So, whatever we do for Social Security, the bottom line is that it has to cost a lot less than it does now.

Smetters: Yes. You can certainly raise some tax revenue in some places. People have talked about increasing the maximum taxable wage cap [currently $106,800]…. That’s not going to… help a lot in present value, because those people will eventually collect more benefits. They’re not going to collect as much… as they paid into the system, but it’s still not going to be super-effective…. People have [also] talked about taxing fringe benefits like health care and so forth. But the fact of the matter is that these benefits are growing faster than inflation. We have to bring Social Security benefit growth rate closer to [the rate of] inflation for it to be a sustainable system. And that’s the easy problem.

Medicare is the tough one.

Knowledge@Wharton: Medicare is tougher, why? Because … people [are reluctant] to give up benefits that have to do with their health care?

Smetters: Medicare is tough for two reasons. One, the shortfall in Medicare is six to seven times larger than in Social Security. Social Security is a major problem; Medicare is a crisis. You add both of those… shortfalls together and you’re getting something that’s … between $80 and $120 trillion in total present value shortfalls. … People can’t even imagine how big that number is. If you took the total value of the United States, except for the people (all the land, houses, buildings, everything that’s non-perishable, your washer and dryer, cars, and so forth), it has about a value of about $50 trillion. So we’re talking about a shortfall of twice the value of the value of the U.S. except for the people. Now, the value of the people is about three times that. We’re just talking about biblically large shortfalls. We’ve never seen this type of problem.

Tags: inflation

1 Comment to Wharton prof: Real fiscal crisis is yet to come

Social Security and Medicare: outlook worsens by the day | Les Jones
May 13, 2009

[...] that Medicare in anything like its current form is completely unsustainable. From a post last week interviewing a Wharton economics professor: Medicare is tough for two reasons. One, the shortfall in Medicare is six to seven times larger [...]