NCPA - National Center for Policy Analysis


September 23, 2008

With the federal government facing $70 trillion in debt, who is going to come to the rescue and bail them out, asks Laurence Kotlikoff, professor of economics at Boston University?

The current debt estimate represents the present value difference between all the government's projected future spending obligations and all its projected future tax receipts.  This gap takes into account the government's need to service official and unofficial debts, including its obligation to pay baby boomers their Social Security and Medicare benefits. 

But there are other obligations, too, that aren't calculated into the national debt for which the government remains at risk, says Kotlikoff:

  • House prices haven't stopped falling; they are down 20 percent from their peak two years ago, but they remain 70 percent above their value in early 2000.
  • If the price pendulum swings back to 2000, we'll see the mortgage default rate, currently at a record 9 percent, soar.
  • We'll also see more Americans file for personal bankruptcies and default on their credit cards.
  • The Federal Deposit Insurance Corporation has $45 billion on hand to cover bank failures, but large-scale bank failures could leave them short hundreds of billions of dollars.

So, how do we pay for this, asks Kotlikoff?  We have two options:

  • Double employer plus employee payroll tax rates immediately and permanently, taking another 15 percent out of our pockets each payday.
  • Cut benefits; Medicare could be scaled back to keep its cost growth in line with the growth in the economy (Social Security is 20 percent underfunded, which means that its taxes have to go up or its future benefits have to come down).

Even though there is still time to put our fiscal house in order, the longer we wait, the more likely we are going to get hit by a true financial and economic earthquake, warns Kotlikoff. 

Source: Laurence J. Kotlikoff, "Is the U.S. Going Broke?" Forbes, September 29, 2008.


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