Apocalypse ain't nigh
Social Security and Medicare notwithstanding, the economy may be in better shape than it seems.
By Justin Fox, FORTUNE editor-at-large

NEW YORK (FORTUNE) - Barring huge tax hikes or huge cuts in promised spending, the U.S. appears headed toward budgetary meltdown a few decades down the road. So what should today's politicians do about it?

Over the past half decade, their approach has looked like this: The Democrats downplay looming funding problems with Social Security and Medicare, but talk a good game about fiscal discipline today. The Republicans show few compunctions about running big deficits today, but talk a good game about doing something to fix Social Security's long-run shortfall. (Nobody in either party has any real ideas what to do about Medicare.)

Compassionate capitalism at Timberland
A new 'nutritional' label on shoe boxes makes a point -- but will it make the company money? (Read the column)

What we've ended up with as a result is seemingly the worst of both approaches: A budget deficit that's expected to hit $423 billion this year, no progress on Social Security, and some regress (that is, a bigger gap between spending and income) on Medicare.

As a card-carrying member of the mainstream media, I should at this point be expected to start ranting about irresponsible politicians and the dire state they've left our nation in. But here's the thing: We aren't in that obviously dire a state.

The economy grew 3.5 percent last year; the unemployment rate is only 4.7 percent. It may not be the best of times for working Americans, beset as they are by outsourcing angst on the one side and high energy prices on the other. But it's not entirely fair to blame Congress and the president for that (although of course many people do).

As for the deficit, the $423 billion projected for this year would be the biggest ever in dollar terms. But by the more reasonable standard of its share of gross domestic product it's 3.2 percent -- "well within the historical range,"as White House budget director Joshua Bolten put it in his turgid defense of the president's new budget in Monday's Wall Street Journal. In 1992 the deficit was 4.7 percent of GDP; in 1983 it was 6 percent; in 1943 it was 30.3 percent.

20 percent of GDP! Or not.

Then there's the long-run prognosis. If you believe the reports of the trustees of the Medicare program in particular, it's really bad. They expect the program's cost to taxpayers to rise from 2.7 percent of GDP in 2005 to 6.8 percent by 2030 and 13.7 percent by 2080. Social Security, which currently eats up 4.3 percent of GDP, is projected to top out at just over 6 percent of GDP in the 2030s and stay there for at least half a century.

Add those together and you get 20 percent of GDP going to the two programs by 2080. In 2005, the total federal tax burden was just 17.5 percent of GDP. If we don't want providing income and medical care to old people to become the sole function of our government, either taxes will have to rise substantially or Medicare and Social Security costs will have to be brought sharply in check.

But is it reasonable to do something about this now? When President Bush proposed cutbacks to Social Security last year, Democratic critics correctly pointed out that projecting revenues and outlays 50 or even 10 years into the future is a wildly inexact science. There's still a lot to be said for being conservative about future Social Security commitments, given that it's a lot easier for today's 40-year-olds to prepare for an increase in the retirement age if they're told about it now rather than 25 years from now.

With Medicare, though, it's hard to know what to make of the actuarial projections. The experience of the past few decades would seem to indicate that health care costs always go up. But they don't have to. Technological advances and political decisions down the road could either cut costs or send them ballooning. This is something our political system simply can't be expected to deal with intelligently right now.

In other words, it's not so hard to see why Washington hasn't done much about either today's deficits or tomorrow's. Today's are of tolerable size, and tomorrow's are, well, tomorrow's.

This is the problem with making budget deficits the focus of political discussion. The question shouldn't be whether we can manage a deficit of 3.2 percent of GDP, because we surely can, but what we're getting in return for it (because that money we're borrowing will have to be paid back someday).

And it shouldn't be about whether Social Security and Medicare will eat up 20 percent of GDP in 2080, because who knows if that will be true, but how we can design a pension and health care system that's sustainable no matter where the demographic and cost trends lead. Anybody want to start that debate?


Snow: Keep taxes low to shrink deficit

Bush proposes $2.77 trillion budget

Dallas Fed boss: Economy not so weak in 4Q Top of page

Follow the news that matters to you. Create your own alert to be notified on topics you're interested in.

Or, visit Popular Alerts for suggestions.
Manage alerts | What is this?