Retirement Cliff Ahead?

By GENE MOYNIHAN | May 01, 2013

If Superstorm Sandy and the fiscal cliff were not enough, there are a series of financial storm clouds gathering in the distance – a potential retirement cliff. I’m referring to the debt of the U.S. government, inflation, much higher taxes and unemployment, all of which could lead us into another recession. If these forces should converge at approximately the same time, they could make Sandy look like a passing summer shower and create a new cliff, a retirement cliff, that could be devastating to the lifestyles of many Southern Ocean County residents.

Just how much money does the government owe? Quite frankly, based on what I’ve been able to learn, I don’t think anyone knows. The nation’s true obligations include the $16.1 trillion in government bonds that have been issued and an array of unfunded liabilities. The National Center for Policy Analysis estimates that as of last Sept. 30, the total public debt was approximately $11.3 trillion. Accrued federal employee pension and other retirement benefits totaled about $5.8 trillion, and there were other federal liabilities of $1.5 trillion. That adds up to $18.6 trillion.

To that number must be added Social Security and Medicare benefits payable to current retirees. These amounts are not included as liabilities on the federal balance sheets although these two programs account for about one-third of federal spending. The accrued benefits of approximately $12.8 trillion when added to the $18.6 trillion above totals $31.4 trillion.

The U.S. government also has additional unfunded Social Security and Medicare obligations, payable to workers who have not yet retired, of approximately $53 trillion. This figure is based on estimates over a 75-year period and should be interpreted with caution, as the number could be over- or understated. In sum, the total of this estimate is $84.4 trillion. Another estimate of the total U.S. debt ( puts it at $123 trillion. That’s about $390,514 per person and $1,011,433 per household. In addition, I have seen estimates from highly respectable sources of $211 trillion.

The big problem is the unfunded liabilities for Social Security, Medicare and Medicaid. When the Social Security program was first enacted, in August 1935, it was intended to be a retirement program for individuals. Amendments in 1939 transformed Social Security into a family-based economic security program. Since then the program eligibility and benefits have been expanded. According to Social Security data, there are currently 55.4 million recipients of old-age, survivors and disability insurance; an additional 8.1 million individuals are receiving supplemental security income, 48.8 million are eligible for Medicare payments, and there were 65.6 million beneficiaries of Medicaid.

Today there are more retirees, and they are living longer than anticipated by the Social Security system. Some 72 million baby boomers, born from 1946 to 1964, are just beginning to retire, at the rate of 10,000 per day. This will continue for the next 16 years, until 2030. All their working lives these folks have been contributing to Social Security. When they retire, they expect to receive the benefits promised to them.

Other entitlement programs such as food stamps and unemployment benefits, etc., however well intended, are also draining the national coffers and are unsustainable in their current form.

Then there’s the Pension Benefit Guaranty Corp., set up by Congress in 1974, currently insuring the pensions of 43 million workers. It is funded by premiums paid by employers. If the employer goes bankrupt, the PBGC steps in and makes good on the worker’s pension. This is not a legal obligation but a moral one. With a deficit of $34 billion in 2012, the PBGC has been classified as a “high risk” agency. There is a 36 percent chance that the PBGC will be insolvent by 2022 and a 91 percent chance of insolvency by 2032.

By the way, the interest on the $16.1 trillion of public and intergovernmental debt is approximately $1 billion a day, about $695,000 per minute.

However you look at it, the U.S. government owes a lot of money. It is dangerously deep in debt. Some might say it is floating on the edge of bankruptcy. The current solution of printing money can last only until the people who buy U.S. bonds decide that the risk of the United States’ defaulting on its debt is too great and invest their cash elsewhere. Then we will have a real problem.

As the result of the unrestrained printing of money, thereby incurring debt, we can reasonably expect inflation to follow. Inflation may be viewed as a hidden tax that allows a government to pay off dear dollars with cheap dollars at the expense of the population, which must suffer the hardships associated with the higher costs of goods and services. It is a particularly cruel loss of purchasing power for those on fixed incomes, such as retirees.

Any attempt to fix the system will mean significant cuts in entitlement programs, which is a form of taxation. Such action would be politically painful to those in Congress and the administration who seem to focus all of their efforts on staying in office. Sadly, recipients of entitlement programs, who have practiced the art of avoiding work, taxes, etc. would lose a portion of the free benefits they have enjoyed that were paid for by someone else. It would also be a wall of pain and hardship for individuals who played by the rules and are now living on modest retirement incomes.

Reducing spending on entitlements alone will not do the job. We should anticipate much higher taxes, and not just on the wealthy. Every wage earner may have to bear a share of the load to get the U.S. economy back on a firm fiscal footing. The 47 percent of U.S. households that don’t pay taxes may not be too happy with the idea. After all, they have been told in countless ways that they will be taken care of. Unfortunately, they will have to come to grips with the notion that there is no such thing as a “free lunch.”

It is now 48 months since the official end of the recession in June 2009 and 45 months from the highest monthly unemployment rate of 10 percent in October 2009, and the U.S. economy is still creeping along, far from a full recovery. Could the unsustainable levels of spending and debt, coupled with inflation and potentially higher taxes, throw the country into a second recession? There are varied opinions on the question. If you listen to the administration, things are getting better. Some economists believe that the United States is walking a financial tightrope, and the Economic Cycle Research Institute has made it clear it believes the next recession has already started.

The next five to 10 years are going to be crucial for the United States. If no action is taken now, the following events might occur in approximately the same general time frame. One can only guess at the consequences. Here are some dates provided in the Social Security Trustees Report:

Social Security: Outgo exceeds income in 2023. Trust funds are exhausted in 2035.

Disability income: 2009 outgo exceeds income and by 2016, funds are exhausted.

Medicare: 2008 expenditures exceed income. Funds are exhausted in 2024.

Pension Benefit Guaranty Corp.: It becomes insolvent between 2022 and 2032.

As you can see, this could turn out to be a monstrous problem. Meanwhile, in Washington the talk is of immigration and gun control. Important issues, yes, but I submit not as important as the future of this country. It’s the old Washington game – a problem postponed is a problem solved. Kicking the can down the road works only for a while. We are at the end of the road and something has to be done, without delay.

Gene Moynihan of Manahawkin is a retired college professor and author of several college textbooks on global business.




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