Is War Between Generations Inevitable?

Studies | Social Security

No. 246
Friday, November 30, 2001
by Jagadeesh Gokhale and Laurence J. Kotlikoff


What Color Is the Ink?

This paper takes a careful look at our nation's fiscal finances. It questions the much-heralded short-term federal budget surpluses, scrutinizes Social Security's and Medicare's finances and examines the nation's overall long-term fiscal situation based on a new generational accounting for the United States. The message of this inquiry is very unpleasant. Whether by design or through neglect, our public officials have misled the nation about our fiscal condition and dug a financial hole from which it will take us years to climb out.

The Congressional Budget Office, under the thumb of its congressional masters, is one of the main culprits. Its practice of making decade-long surplus projections based on extreme assumptions about federal spending has lulled the country into believing we can afford to cut taxes, raise spending or both. The trustees of the Social Security and Medicare systems are no better. They systematically understate the long-term costs of these programs at a time when they are both underfunded by roughly 40 percent.

Learning the truth about Social Security's and Medicare's finances prompts the following question: Are the rest of the government's long-term finances sufficiently in the black to bail out these programs? The answer, based on the latest generational accounting, is an emphatic no. This analysis, produced with the help of John Sturrock of the Congressional Budget Office (CBO), shows a huge shortfall in the nation's overall long-term finances.

"There's a huge shortfall in the nation's overall long-term finances."

The new accounting incorporates the latest CBO long-run revenue and expenditure projections with two caveats. First, it extends into the future the Joint Committee on Taxation's (JCT) decade-long estimates of the revenue and expenditure impacts of the 2001 tax cut.2 Second, it assumes that federal discretionary spending will grow with the economy rather than decline by over one-fifth relative to gross domestic product (GDP) between now and 2010. By contrast, the CBO imagines that federal spending will stay fixed in real terms for a decade while the economy grows. This seems highly unlikely for reasons discussed below and is belied by the past year's experience in which discretionary spending grew as fast as the economy.

Non-economists reading this are likely to wonder if we're all living on the same planet and, if so, whether these findings are to be trusted. We are, and they are. All the data used in this analysis come straight from the same government agency - the CBO - that has delighted and misled us, whether intentionally or not, with its short-term budget surplus projections. The reality is that 77 million baby boomers are going to retire within 30 years and the federal government is ignoring and hiding the implications of this fact.


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