AMERICA'S SOCIAL SAFETY NET IS FRAYING FAST

January 26, 2009

By 2017, the U.S. government will be obliged to stop sending Social Security checks to one in every four people who qualify for them.  Alternatively, it will be obliged to reduce payments by 25 percent for all qualified recipients.  Why?  By 2017, the U.S. pay-as-you-go Social Security system will fail to pay its way for the first time since the Great Depression.  Wealthy as it is, the United States can't borrow the escalating sums needed to make up the deficit, says Canada's The Globe and Mail.

In fact, the future might be even bleaker, says the National Center for Policy Analysis:

  • By 2010, the federal government will need to stop doing 1 in 10 things it does now.
  • By 2020, it will need to stop doing one in four things it does now.
  • By 2030, it will need to stop performing half of the services it provides now.
  • By 2050, Social Security and Medicare will consume the entire federal budget.

Could there be an easier way out? A 2007 International Monetary Fund paper suggests a novel approach: the public will permit government to increase its share of gross domestic product (GDP) permanently, provided the public thinks it is getting a fair deal in the exchange:

  • Historically, the public permits government to increase its share of GDP only when "tax technology" -- the physical mechanics of taxation -- makes the payment of these taxes more efficient.
  • For example, the United States has continuously reduced defense spending (from 15 percent of GDP (1952) to 4 percent (2006)) and increased social entitlements (from 3 percent of GDP (1950s) to 12 percent (2006)).
  • These new "technologies" have quadrupled the government's share of GDP to 20 percent.

Yet, even with more affordable programs, the government will still need to increase its tax revenues as a share of GDP, say researchers.  The public will permit this increase, provided only that it is directly linked to reform of the tax system."  A single-rate flat tax could be the answer.

Source: Neil Reynolds, "America's social safety net is fraying fast," The Globe and Mail, January 23, 2009; based upon: Tamim Bayoumi and Fernando Goncalves, "Government for the People: On the Determinants of the Size of U.S. Government," International Monetary Fund, Working Paper, No. 07/289, December 2007.

For NCPA study:

http://www.ncpa.org/pub/st317/ 

For IMF text:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1078794 

 

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