What Washington Won't Tell You About the Next Economic Crisis

1. What Washington Won't Tell You About the Next Economic Crisis Brian Riedl Grover M. Hermann Fellow for Federal Budgetary Affairs The Heritage Foundation May 3, 2011

2. I.Deficits & Debt are Surging

3. Under Current Policies, Budget Deficits Will Soon Rise to Nearly $2 Trillion

4. Annual Net Interest Costs are Set to Nearly Quintuple by 2021

5. The National Debt is Set to More Than Double

6. In the Absence of Major Reform, the National Debt Will Eventually Reach Cataclysmic Levels

7. II.Spending – Not Tax Cuts – Drives Future Deficits

8. Real Federal Spending is Projected to Rise $13,000 Per Missouri Household Between 2007 and 2021

9. Rising Spending – Not Falling Revenues – Drives the Long-Term Deficit

10. The Long-Term Picture of Soaring Federal Spending

11. III.Spending is Driven by Social Security, Medicare, & Medicaid

12. Composition of Federal Spending, 1962-2010

13. Social Security, Medicare, Medicaid, & Net Interest Costs are Driving Spending

14. Why Social Security, Medicare, & Medicaid are Going Bankrupt • 77 million baby boomers will retire between 2008 and 2029. • Ratio of workers supporting each retiree: • 1960 – 5-to-1 • 2008 – 3-to-1 • 2030 – 2-to-1 • By 2030, a married couple will have to support themselves, their children – and their very own retiree. • In addition to demographics, Medicare also must deal with rising health care costs. • Senior health care will also push up Medicaid costs.

15. Social Security, Medicare, & Medicaid Costs As a Percent of GDP

16. Solution 1: Raise Taxes? • The problem is not falling revenues. It’s that we’ve promised ourselves exorbitant spending at the next generation’s expense. So how is drowning them in taxes any better than drowning them in debt? • Would have to hike middle-class Missourians’ tax rate to 63%, and upper-class Missourians’ & small businesses’ rate to 88% • Large tax increases have shown to reduce economic growth, kill jobs, lower incomes, & increase poverty. • Should we trust Washington to apply new tax revenues to deficit reduction? Or will they just spend it on new programs?

17. Solution 2: Cut Other Programs?Solution 3:Wait & Hope Problem Solves Itself? • Washington would have to eliminate every other federal program by 2030 to finance the big 3 entitlements. • Economic growth projections are subject to error. Yet the coming retirement of 77 million baby boomers is not a theoretical projection. Its already begun. • Europe is already experiencing these same problems. • Unless reforms begin within 5 years, the budget may not balance again for decades. • Fiscal crisis result: Stock/bond market collapse, soaring interest rates, dollar abandoned, drastic budget reforms.

18. The Popular “Alternative Cuts” Cannot Offset the Cost of Major Entitlements Over the Next Decade

19. The Only Solution: Modernize Social Security, Medicare & Medicaid Now • Reform is the only way to avoid an economic crisis. • Hold harmless those under age 55? Four million baby boomers cross this threshold annually. All will have by 2019. • Begin with long-term spending caps on Social Security, Medicare & Medicaid, then: • Adjust Social Security eligibility age & adjust benefits at the top. • Move Medicare to a premium support program (the only alternative is government rationing & underpaying providers). • Reform Medicaid & encourage purchase of long-term care coverage.

20. Conclusion • This issue is about more than economics. It is about the future we want. • There is a moral question of whether we should hand a multi-trillion dollar retirement bill over to the next generation. • In the absence of fundamental reform, those entering the workforce today will experience both higher lifetime tax rates and lower incomes than their parents as a result of these retirement costs. • America has overcome other great challenges, surely we are up to this one.