NCPA - National Center for Policy Analysis


August 22, 2006

Will America have to declare Chapter 11 because of $80 trillion in unfunded entitlement promises of Medicare, Medicaid and Social Security?  Economist Laurence Kotlikoff believes the answer is perhaps yes unless we reform our fiscal institutions.

Kotlikoff and his allies contend that we can't grow our way out of this mess because the promised benefits are scheduled to rise at the rate of real wage increases.  Technically that's right, but it misses a key point, says the Wall Street Journal: 

  • Paying benefits to 75 million baby boomers in 2030 will be a much lighter lift if we have a $25 trillion gross domestic product (GDP) and net worth of $100 trillion than if slower growth in the interim years leaves us, say, a third less wealthy. 
  • The most vital policy imperative is to sustain pro-growth policies, including free trade, free capital flows, low taxes and an education system to train our human capital.

The biggest false assumption, however, is that the current level of benefits will ever be paid.  They won't, says the Journal: 

  • If current politicians are too afraid to reduce future benefits or reform the programs, future politicians will have no choice -- unless they want to raise taxes to confiscatory levels or have no money to spend on other priorities, such as national defense.
  • It is precisely the unsustainability of these future benefits that will make reform attractive to younger people who realize they have no hope of getting what they're now paying for.

The national treasury isn't what's going bankrupt.  That description better applies to the New Deal and Great Society programs that were designed for another era and long ago became unsustainable.  Sooner or later they'll have to be changed, and this is where reformers should focus their political effort, says the Journal.

Source: Editorial, "The Entitlement Panic," Wall Street Journal, August 22, 2006.

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