NEW YORK (CNN/Money) - Are the budget deficits, the national debt and the financial problems of the Social Security system smoke and mirrors -- that is, something our "all talk and no action" politicians just like to squabble about? Or are they something we really need to worry about?

-- Bob Zak, Frederick, Maryland

These issues can be really confusing, especially in an election year when various candidates' camps begin putting a self-serving spin on what are usually very selective sets of stats to begin with (i.e., whatever makes the opponent look bad).

So let's keep this simple. I'll start with the budget deficit and national debt.

But I'll also discuss what I think is a much more important, and much bigger, potential liability -- the future cost of Social Security and Medicare.

Any time our government spends more money in a given year than it collects in tax revenue, we have a budget deficit.

The Congressional Budget office estimates the deficit for this year will come in at $477 billion. To bridge that gap between revenue and spending, the government borrows by issuing Treasury bonds. These bonds become our national debt.

Recently, our national debt stood at just over $7.1 trillion, or a bit more than $24,000 for each man, woman and child in the U.S.

You can track the size of our national debt at any moment, by going to the Debt Clock Web site.

Those bonds will be repaid, not from some secret government stash, but from tax revenues that you and I and corporations pay. Some of those bonds will be paid off by you and me. But to the extent that the debt matures after we're gone, it will be passed on to future generations.

And that's where the potential problem arises. If we continue to run ever higher deficits and let this debt expand, the interest required to service it will take up a larger share of their resources, which would mean higher taxes and less money left over for other things.

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The analogy would be a family that keeps borrowing until it reached the point where the monthly payments on the debt were so high it had little left over to buy a home, pay for the kids' college educations, fund retirement, etc.

There's also a possible shorter-term issue in that the need to sell more bonds to finance increasingly large deficits could lead to higher interest rates, which could dampen economic growth and make things like mortgages more expensive. But the relationship between deficits and interest rates isn't clear cut, so let's not get into that.

In any case, I don't think we're at any crisis point with national debt. Deficits had been declining until recently and even though we have run up huge new ones lately, I still think we have ample opportunity to get them under control.

If I had my druthers, I'd rather see that happen through higher economic growth and spending restraint than tax increases (which, I fear, would simply feed the spending machine in DC), but that's something for the voters and Congress to decide.

But the national debt isn't the only gauge of our liabilities as a nation. We have other obligations we'll also have to meet in the future, the largest of which is the cost of providing Social Security and Medicare to current and future retirees. And that obligation is much larger than the current national debt.

You've already read a lot in the press about the problems facing Social Security and Medicare. I won't inundate you with a long list of stats describing these programs' many problems.

Suffice it to say that the fundamental problem is that their projected spending on benefits far outstrips their projected funding from payroll taxes and premiums.

In fact, if you tote up the present value of these programs' spending for current and future generations of retirees and then subtract that from the present value of the payroll taxes and premiums earmarked for these programs, you come up with a shortfall of roughly $72 trillion, an amount that dwarfs the national debt.

What this shortfall means is that, if we wanted to put aside enough money today to assure that, combined with all the payroll taxes and premiums we'll collect for these programs, that we would have sufficient resources to pay the benefits promised, we would have to set aside $72 trillion.

Of course, we wouldn't actually do that even if we had an extra $72 trillion lying around (which we don't).

If you'd like to see a detailed breakdown and analysis of these figures, check out the 2004 Trustee reports for Social Security and Medicare, which you can access by clicking here. (Scroll to the bottom of the page for the Medicare report.) You may also want to read what yours truly said in the past about Social Security and Medicare.

Now, all this may sound far off, but that's not the case. In fact, starting this year, spending for Medicare's hospitalization program will exceed what's collected in payroll taxes, which means it's got to rely on general government revenues (i.e., our income taxes mostly) to keep going. The same thing will happen for Social Security in about 14 years.

Yes, the Social Security and Medicare trust funds won't run out of assets for some time to come. But let's be clear on this. When the Social Security or Medicare trust fund uses a Treasury bond from the trust fund to pay for spending, the only way the Treasury department has of paying off that bond is to tax us or borrow more money.

It's not like a pension fund cashing in a corporate bond to pay pensioners. The assets in the Social Security and Medicare trust funds are nothing more than the ability to tax current shareholders or borrow so that future taxpayers foot the bill.

Ultimately, of course, the budget deficit, the national debt and the financing problems of Social Security and Medicare are intertwined.

When spending for Social Security and Medicare exceeds the taxes and premiums earmarked to fund those programs, the federal budget in that year will have to pick up the shortfall.

In other words, given current projections these two programs will end up soaking up an increasingly large percentage of tax revenues in the future. And unless there are cuts in other programs or higher taxes, we'll see larger and larger budget deficits.

So should we worry about all this? I don't want to alarm anyone by saying we have a crisis on our hands today. But I think it's also clear that we can't indefinitely continue down the path we're headed.

Frankly, I don't have much faith in politicians to address these issues. The choices are too unpopular. Elected officials don't like telling people their benefits may have to be reined in or that a program might have be reformed to reflect economic reality.

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But I do have faith in markets. And I believe that if these issues aren't addressed at some point in the not-too-distant future, the markets will react and enforce their own particular form of discipline.

That will probably come in the form of higher bond yields, which will raise borrowing costs for the government, businesses and consumers. And that will mean lower rates of economic growth and less vibrant increases in our living standard.

But who knows, maybe the people inside the beltway will do something before the market acts. We can always hope.

Walter Updegrave is a senior editor at MONEY Magazine and is the author of "We're Not in Kansas Anymore: Strategies for Retiring Rich in a Totally Changed World." He also answers viewers' questions on CNNfn's Money & Markets at 4:40 PM on Mondays.