Like it or not, we face a hard fiscal truth. Uncle Sam, like the rest of us, has a budget constraint. Economists call it the government’s intertemporal budget constraint (IBC). It’s as fundamental an equation in economics as the conservation of energy is in physics. It’s also called the No Ponzi-Scheme Condition. It rules out each generation leaving the next generation to pay its bills.
In short, government spending is a zero-sum generational game. The more we let current generations off the hook, the more we put future generations on the hook. Were our fiscal finances simply terrible, our politicians’ pledges to keep Social Security, Medicare, defense spending, and most everything else “off the table” would be simply terrible.
But things are beyond terrible. We’re facing a massive imbalance in the IBC. Economists call the IBC imbalance The fiscal gap. It records the gap between projected future government outlays and receipts — all measured in present value. By considering all outlays and receipts, regardless of their politically specified labels, the fiscal gap puts everything on the books.
In contrast, the official debt leaves off the books all future obligations to pay Social Security and Medicare benefits, maintain the nation’s defense, repair the highways, pay for the President’s lunch — you name it. According to the Congressional Budget Office, official debt is now $24.3 trillion. That’s miles below Social Security’s $61.8 trillion or Medicare $103.4 trillion unfunded liabilities, to reference just two off-the-books obligations.
Our country’s fiscal gap is 7.7 percent of the present value of all future GDP. Closing it, requires an immediate and permanent 41.3 percent increase in all federal taxes, an immediate and permanent 35.3 percent cut in all non-interest federal spending, or a combination of these horrendous alternatives. Can we wait to adjust? Yes, but only by forcing today’s and tomorrow’s children to pay even more of our bills.
There is, though, one exception to the zero-sum generational calculus. It’s reorganizing policy to achieve more for less. Fortunately, our fiscal system is not just broke. It’s incredibly inefficient.
The prime example is U.S. healthcare. We’re spending 18.3 percent of GDP on healthcare, yet rank 18th internationally in healthcare outcomes. Sweden’s healthcare system is the world’s 4th best, but costs 7 percentage points of GDP less! That’s almost the size of our fiscal gap.
The Better Care Plan can shave off many points of federal healthcare spending, while improving healthcare outcomes. It entails competitive universal health insurance with federal payments to providers based on their clients’ pre-existing conditions. The Plan is, effectively, Senator Sanders’ Medicare for All. But it’s built off the Republican Medicare Advantage option, albeit with strict standardization to prevent cherry picking.
Social Security represents another opportunity for cost-saving, radical reform. The system, with its 2728 rules and hundreds of thousands of rules governing just 13 basic benefits, is not just beyond broke. It’s extraordinarily sexist and unbelievably cruel. And it leaves its 70 million beneficiaries at daily risk of having past benefits clawed back because Social Security had mistakenly overpaid.
We need to transition to a modern personal account system. The Personal Security System (PSS), proposed by Republican Presidential candidate, Steven Laffey, is an example. The PSS is fully funded, progressive, and sex neutral in practice, not theory. It invests all participants in an identical market-weighted index of domestic and international securities, guarantees a positive return, after inflation, and pays out all contributions and returns as inflation-projected pensions. Best of all, the system would be run by a single computer at zero cost. Wall Street would have no involvement.
A third fiscal fix involves the current fiscal system’s horrific work disincentives, which induce millions of Americans, particularly those with low incomes, to work less or not at all. The Purple Tax Plan, proposed by one of us (Kotlikoff), would replace the federal corporate, income, and estates taxes with a federal retail tax, a business cash-flow tax, a progressive consumption cash-flow tax, an inheritance tax, and a carbon tax. Together with welfare reform, they would reduce and equalize all Americans incentives to work, reduce inequality, and replace our hodge-podge of green-energy incentives with a simple tax on carbon emissions.
There are other ways to avoid a fiscal disaster. But none of them will arise by taking things off the table. At this critical juncture in our nation’s history, we need to think big or watch our kids head to countries that are solvent.