Bernanke’s Boomer Alert
By Mark Mills, CFP
In a recent speech, Federal Reserve Chairman Ben Bernanke called social security and Medicare “unsustainable entitlement programs.” It was a warning of special interest to Boomers.
Facing an aging population with longer life expectancies, the federal government, said Bernanke, will not be able to provide promised benefits without huge tax increases, major budget cuts in other areas, or piling hundreds of billions of dollars onto the national debt (i.e. passing the burden onto our children and grandchildren.)
How bad is the emerging entitlement crunch? Bernanke says social security and Medicare “will increase from about 7 percent of the U.S. gross domestic product (GDP) today to almost 13 percent of GDP by 2030.” That’s a staggering increase in a relatively short time. But remember, there are 78-million Boomers who will be running up Medicare bills and waiting for that social security deposit on the first of the month.
Taxing our way out of the problem would mean federal revenues would have to rise from about 18 percent of GDP today to about 24 percent of GDP in 2030, an increase of one-third in the tax burden over the next twenty-five years, according to the Fed chief. Inflicting that punishing level of taxation seems unconscionable, not to mention politically impossible.
In the wake of 9/11, with huge increases in defense spending, cutting hundreds of billions in “non-entitlement” spending also seems unlikely.
Bernanke mentioned another option: reform of the major entitlement programs. He did not give specific recommendations. That is a political issue, and both Presidents Clinton and Bush have failed in their efforts to achieve social security reform. Congress just doesn’t have the stomach to cut benefits or raise taxes, especially when the worst of this slow motion disaster will happen on somebody else’s watch, years down the line.
All I can say to Boomers is get ready for a cut in benefits. We will have intergenerational warfare if we try to lay this entire burden on our kids and grandkids. Who wants to do that, anyway?
The cuts could come in many ways, including delaying eligibility for full
benefits, reducing benefits for more affluent recipients (means testing), trimming back cost of living adjustments, higher co-pays and fees for Medicare. It’s a bottomless bag of tricks. But in the end, many Boomers will not get what they have been promised.
While Congress has no guts when it comes to solving tough problems, they did pass a law requiring the Social Security Administration to send out annual personal statements to workers detailing their projected social security benefits. Yes, the statement says somewhere that the benefits are not guaranteed. But what’s the point in sending it out? It seems morally bankrupt to send out a statement projecting a level of benefits the Fed chairman says is “unsustainable.” When Alan Greenspan ran the Fed he issued the same warning, repeatedly.
Both Fed chiefs also said the sooner action is taken the more time people will have to plan for the downward adjustments. By delaying action, Congress spares itself the political risk, but makes the eventual outcome more painful for Boomers and the rest of the nation.
Link to full text of Bernanke's speech.
In a recent speech, Federal Reserve Chairman Ben Bernanke called social security and Medicare “unsustainable entitlement programs.” It was a warning of special interest to Boomers.
Facing an aging population with longer life expectancies, the federal government, said Bernanke, will not be able to provide promised benefits without huge tax increases, major budget cuts in other areas, or piling hundreds of billions of dollars onto the national debt (i.e. passing the burden onto our children and grandchildren.)
How bad is the emerging entitlement crunch? Bernanke says social security and Medicare “will increase from about 7 percent of the U.S. gross domestic product (GDP) today to almost 13 percent of GDP by 2030.” That’s a staggering increase in a relatively short time. But remember, there are 78-million Boomers who will be running up Medicare bills and waiting for that social security deposit on the first of the month.
Taxing our way out of the problem would mean federal revenues would have to rise from about 18 percent of GDP today to about 24 percent of GDP in 2030, an increase of one-third in the tax burden over the next twenty-five years, according to the Fed chief. Inflicting that punishing level of taxation seems unconscionable, not to mention politically impossible.
In the wake of 9/11, with huge increases in defense spending, cutting hundreds of billions in “non-entitlement” spending also seems unlikely.
Bernanke mentioned another option: reform of the major entitlement programs. He did not give specific recommendations. That is a political issue, and both Presidents Clinton and Bush have failed in their efforts to achieve social security reform. Congress just doesn’t have the stomach to cut benefits or raise taxes, especially when the worst of this slow motion disaster will happen on somebody else’s watch, years down the line.
All I can say to Boomers is get ready for a cut in benefits. We will have intergenerational warfare if we try to lay this entire burden on our kids and grandkids. Who wants to do that, anyway?
The cuts could come in many ways, including delaying eligibility for full
benefits, reducing benefits for more affluent recipients (means testing), trimming back cost of living adjustments, higher co-pays and fees for Medicare. It’s a bottomless bag of tricks. But in the end, many Boomers will not get what they have been promised.
While Congress has no guts when it comes to solving tough problems, they did pass a law requiring the Social Security Administration to send out annual personal statements to workers detailing their projected social security benefits. Yes, the statement says somewhere that the benefits are not guaranteed. But what’s the point in sending it out? It seems morally bankrupt to send out a statement projecting a level of benefits the Fed chairman says is “unsustainable.” When Alan Greenspan ran the Fed he issued the same warning, repeatedly.
Both Fed chiefs also said the sooner action is taken the more time people will have to plan for the downward adjustments. By delaying action, Congress spares itself the political risk, but makes the eventual outcome more painful for Boomers and the rest of the nation.
Link to full text of Bernanke's speech.
posted at 1:09 AM
4 Comments:
I've always believed that there should be more done by the search engines to educate Baby Boomers to the Internet and search from a consumer advocate and national pride perspective.
If Boomers would shop more wisely online for better value, and make some extra money online from legitimate home based businesses, it may not totally solve the problem, but it might help some.
My blog post on this has a "Baby Boomer Official Strain Seal":
http://www.brokerblogger.com/brokerblogger/2006/10/bernanke_baby_b.html
Mark, I read your commentary and to be honest, I'm a little baffled. Why should this come as a surprise to you or to anyone else? The system, as it currently stands, is barely sustainable now. As more boomers age, more retire, etc etc... isn't it obvious that the additional burdens placed on the system will necessitate major changes? Is this even news?
Bernanke's comments were no surprise to me. As I said, Alan Greenspan talked about this repeatedly. But we keep getting our bogus annual statements from social security, and the federal government remains brain dead about the issue, so I will continue to focus on social security's solvency problems, even if it isn't exactly breaking news.
Bernanke and his predecessor, along with this administration's policies, all have exacerbated each of the problems Bernanke enumerated. It's documented in their own long-range budget projections. To summarize, the primary long-run budget problems are:
* Revenues. Continuing the 2001-04 tax cuts that render Medicare and Social Security benefits, among other fundamental missions of the federal government, increasingly at risk for those currently and soon to be retired, as well as for the disabled;
* Defense. Maintenance of debatable growth in defense spending;
* Health care. Creation of a new, massive, unfunded addition to Medicare, and a failure to launch a serious inquiry into structural reform of the U.S. health care system;
* Deficits. Excessive deficit spending over the next 10 years, giving rise to permanent increases in federal debt and interest payments.
The most obvious cure is like the elephant in the room no one notices. Instead we only hear from people vested in the vast fraud that constitutes our Federal government the shibboleth of raising taxes, which is merely a boogeyman used to frighten us -- as though there is no alternative to simply taxing us for more money. We are to assume what we now spend is all justified and proper, are we? Remember, we may have been born at night, but as boomers, not last night.
So what is the cause of our problem? It is the unjustifiable amount of money in the Defense Department's budget - a disproportionate amount that cannot be justified by the words "National Security." If it could, there would be adequate troops adequately equipped to do their job. Instead, the defense budget is merely a fraudulent tool of a corruption so vast and deep we fail to mention it in polite company. That defense budget exists merely to funnel the vast majority of America's tax dollars into the private pockets of political friends from both sides of the aisle.
To fix this, we must complete reform and reduction of our defense budget so that we spend on defense only that which we actually need to defend the nation, not benefit unfairly the already obscenely overcompensated and piratically profitable corporate pals of the pols.
It is eminently dooable - just takes political will a dose of reality and a strong stomach.
Do this to prove my point: make a simple pie chart of the Federal budget - look at Defense vs non-defense. Now tell me how you can jusify the proportion.
We don't need new taxes - we need to stop allowing our so-called "representatives" from stealing public money for what amounts to war profiteering by the corrupt military-industrial-congressional death machine.
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