There is a silent monster that looms menacingly over U.S. government finances. Every politician knows about it, but very few of them ever want to talk about it. This silent monster grows larger every year, and yet nobody seems to know quite what to do about it. Those who have closely analyzed this monster all seem to agree that one day it will create a financial tsunami of a magnitude that is absolutely unprecedented, but there is vast disagreement about how to escape this financial tsunami or if it is even possible to escape it. The name of this monster is "entitlements" - Social Security, Medicare and other social Ponzi schemes that the U.S. government has locked itself into funding. It would be hard to understate the seriousness of the problem that entitlements present. In fact, according to an official U.S. government report, rapidly growing interest costs on the national debt together with spending on major entitlement programs will absorb approximately 92 cents of every dollar of federal revenue by the year 2019. By 2020, that figure will be up around 100 cents of every dollar of federal revenue. So that means that interest on the debt and spending on entitlement programs will eat up everything the U.S. government takes in before a penny is spent on anything else. That is a recipe for national financial suicide.
And unfortunately, the problem is only going to get far, far worse when you project things out beyond the year 2020. Right now, interest on the debt and spending on entitlement programs like Social Security and Medicare eat up only about 10 percent of GDP. By 2080, they are projected to eat up approximately 50 percent of GDP. In fact, things are even more dire than the chart below indicates. This chart is based on previous government figures that projected that mandatory spending will exceed government revenues at some point between 2030 and 2040, but the latest government figures now project that this will happen right around 2020. So as mind blowing as this chart is, keep in mind that it actually understates the problem we are facing....
This week, there was news that the Social Security system is in much worse shape than previously projected. According to the Congressional Budget Office, this year the Social Security system will pay out more in benefits than it receives in payroll taxes. This was not supposed to happen until at least 2016.
Now it is happening in 2010.
It turns out that the "recession" that we have just been through has hit Social Security revenues really hard.
And unfortunately, as waves of Baby Boomers start retiring, these "Social Security deficits" are going to get even worse.
So where will the money come from to pay the benefits that are owed?
For now, the money will come from the $2.5 trillion Social Security Trust Fund that has been accumulated.
But keep in mind that the $2.5 trillion figure is extremely misleading.
There are not $2.5 trillion dollars sitting around in a bank account somewhere to pay these benefits.
The truth is that the Social Security Trust Fund does not contain any actual assets.
The only assets the Social Security Trust Fund has are IOUs from the U.S. government.
So basically the U.S. government owes the Social Security Trust Fund $2.5 trillion dollars, and now it turns out that the Social Security system is going to start needing that money.
So where will the U.S. government get that money?
Well, they will borrow it of course.
The reality is that the Social Security program is simply not sustainable.
Back in 1950 each retiree's Social Security benefit was paid for by 16 workers. Today, each retiree's Social Security benefit is paid for by approximately 3.3 workers. By 2025 it is projected that there will be about two workers for each retiree.
As a society, we simply have not been producing enough new workers to sustain the current system.
Of course the politicians all say the right things to make us think that they are going to do something about this crisis. For example, Barack Obama recently had the following to say about the massive deficits the U.S. government keeps piling up: "It keeps me awake at night, looking at all that red ink".
But the truth is that neither political party would dare propose a dramatic restructuring of Social Security or Medicare that would significantly reduce benefits.
Because it would be political suicide.
Say what you want about old people - the truth is that they vote more than the rest of us do.
Anyone who would dare "take away" their Social Security or Medicare would suddenly find hordes of old people voting against them in the next election.
But something has to be done.
The 2009 Financial Report of the U.S. Government was recently released, and it basically says that the U.S. government is facing financial Armageddon if something drastic is not done....
Absent a change in policy, under this scenario, the interest costs on the growing debt together with spending on major entitlement programs could absorb 92 cents of every dollar of federal revenue in 2019.
Keep in mind that this is before anything is spent on defense, health care, education, homeland security, job creation or anything else.
The following chart was pulled right out of the report. These aren't the projections of some Internet wacko. These projections are in an official U.S. government report. The implications of the chart below are absolutely mind blowing....
Keep in mind that the U.S. government and the U.S. economy are already on the verge of financial oblivion in 2010. So what is going to happen if these projections are anywhere close to accurate?
In addition, the report also admitted that the present value of projected scheduled benefits exceeds earmarked revenues for entitlement programs such as Social Security and Medicare by about $46 trillion over the next 75 years.
Either the U.S. government is going to have to radically slash Social Security and Medicare benefits or they will have to come up with tens of trillions of extra dollars from somewhere.
And remember, the $46 trillion figure is just the "present value" of those future payments.
Because of inflation, the "actual value" of those future payments will be far greater.
In a section about Social Security and Medicare, the authors of the report confessed that "it is apparent that these programs are on a fiscally unsustainable path".
Obviously something has got to give.
These programs cannot keep on paying the same level of benefits.
It is financially impossible.
But what are we going to do? Millions upon millions of elderly Americans rely on these programs.
Are we going to reduce payments to a level where they can only afford dog food to eat and a shack to live in?
As a society, we are really between a rock and hard place.
If we continue on the same path, the United States government is going to go bankrupt.
But any politician who tries to cut benefits or raise taxes will likely face the wrath of the voters at the ballot box.
So for now the U.S. government just continues to spend even more money and continues to go into increasing amounts of debt - apparently hoping that somehow everything will just turn out okay.
But things are not going to turn out okay. We are headed for a financial mess of horrifying proportions.
The truth is that it doesn't matter how much the U.S. government cuts spending in other areas if it does not get entitlement spending and interest on the national debt under control. If those expenditures are not addressed, it is absolutely guaranteed that the U.S. government will be swamped in red ink for many years to come.
But until severe financial pain starts happening, a large percentage of the American people are not going to be motivated to do anything about this problem.
But by then it will be too late.