The above four multi-trillion-dollar liability balls are staggering in their implications. Remember first of all that the nearly $65 trillion of entitlement liabilities shown above are not some estimate of future spending. They are the discounted net present value of current spending should it continue at the projected demographic rate (importantly ­”“ it is much higher than the annual CPI + 1% used as a discounter because demand for healthcare rises much faster than inflation.) And while some Honorable Congressional Le Pews would counter that Medicaid is appropriated annually and therefore requires no discounted reserve, those words would surely count as “sweet nothings,” believable only to those whom they romance every several years at the polls. The incredible reality is that the $9.1 trillion federal debt that constitutes the next-to-tiniest ball in our chart is nothing compared to unfunded Medicaid and Medicare. It is like comparing Pluto to Saturn and Jupiter. The former (the $9.1 trillion current Treasury debt) does not even merit planetary status in our solar system of discounted future liabilities. It’s really just a large asteroid.

Look at it another way and our dire situation becomes equally revealing. Suppose that the $65 trillion of entitlement liabilities were fully funded in a “lockbox,” much like Social Security is falsely imagined to be. Just suppose. And say the cost of that funding (Treasury debt) was the same CPI + 1% that was used to produce the above discounted present value in the first place. Actually, that’s not a bad guesstimate for the average yield of all Treasury debt. If so, then the interest expense on the $75 trillion total debt would equal $2.6 trillion, quite close to the current level of entitlement spending for Social Security, Medicare and Medicaid. What do we pay now in interest? About $250 billion. Our annual “lockbox” tab would rise by $2.35 trillion and our deficit would be close to 15% of GDP! The simple conclusion would be this: Unless you want to drastically reduce entitlement spending or heaven forbid raise taxes, then Pepé, you’ve got a stinker of a problem.

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As state and federal lawmakers search for ways to reduce government spending, some economists are urging them to raise the retirement age to ease budget pressures.

If Americans were to work longer, they would pay more in taxes, and at the same time reduce the cost of government pensions and Social Security benefits, according to these economists.

But others disagree. They say the fast-moving 21st century economy doesn’t need older workers as much as it needs young workers with the latest job skills.

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John Boyd writes:

The leaders of both political parties have come to embrace the philosophy of the common box turtle. They believe the key to success is to refuse to “go first” and never “lead with your chin.” They are convinced the loser will be the one who is forced to propose solutions to the problems they were elected to solve. This behavior is not acceptable.

We expect our leaders to analyze the pressing issues of the day based on the best information available and then to reach a consensus concerning the best course of action.

Read the rest of his letter and the others also.

President Obama’s budget director, Jacob Lew, said as much last week during his briefing on the president’s budget. Obama wants to find ways to “work together to find a solution to the long-term issues in Social Security,” Lew told reporters, but the program “does not contribute to the deficit in the short term.”

That would be nice if it were true. It’s not.

Social Security is a cash-in/cash-out program. It went into the red last year, when payroll tax revenue came up about $37 billion short of the benefits paid to retirees. Initially, that shortfall seemed a temporary consequence of the recession. But new projections from the Congressional Budget Office show that factors such as the payroll tax cut Obama and congressional Republicans agreed to last year mean that Social Security will instead come up short every year from now on ”” at least $45 billion this year, and a staggering half a trillion dollars over the next decade.

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Let’s indulge Mr Obama in his fantasy economics: imagine that he does reduce the deficit to 3.1%. Supposedly, that would stabilise government debt: but it would do so at a dangerously high level of around 80% of GDP, and as interest rates rise the target will become much harder to hit. And that is before you consider the biggest problem of all: as more and more baby-boomers retire (the first started to do so this year), their demands for pensions and government-provided health care will start to push the deficit sharply up again after that.

Indeed, the real problem with both Mr Obama’s budget and the Republicans’ proposals is not so much the half-truths and fibs within them, as all the things they both left out. America needs to simplify its tax system and (slightly) increase its overall tax take. It needs to rein in its defence spending, which is currently equivalent to that of the next 20 countries combined. And it needs to tackle the gathering surge in entitlement costs. All these recommendations were made by the deficit-reduction commission that Mr Obama himself set up, but his budget conspicuously fails to take up any of them. Other debt-burdened Western countries have embarked on a stringent diet. America continues to gorge.

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The 401(k) generation is beginning to retire, and it isn’t a pretty sight.

The retirement savings plans that many baby boomers thought would see them through old age are falling short in many cases.

The median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain its standard of living in retirement, according to data compiled by the Federal Reserve and analyzed by the Center for Retirement Research at Boston College for The Wall Street Journal. Even counting Social Security and any pensions or other savings, most 401(k) participants appear to have insufficient savings. Data from other sources also show big gaps between savings and what people need, and the financial crisis has made things worse.

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When Congress takes up President Obama’s fiscal 2012 budget, the debate will center on just a fraction of the overall $3.7 trillion budget: his proposals on spending and how to pay for them.

Not counting what the government spends on national security and social safety-net programs such as Medicare and Social Security, spending on other domestic programs accounts for just 12% of the overall budget.

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I wonder if Mr. Obama is at all embarrassed by the 2012 budget. Like his previous two budgets, this one breaks all those “Morning in America” campaign promises of a “new” Washington.

The 2012 budget also is a repudiation of the findings of his very own bipartisan deficit commission.

The Bowles-Simpson commission had plenty of sensible recommendations, like cutting funds for the Corporation of Public Broadcasting, eliminating the Office of Safe and Drug-Free Schools and raising the qualifying age for Social Security.

But you’ll find precious little of this in the 2012 budget. At the White House, political sense apparently matters a lot more than common sense.

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Social Security’s finances are getting worse as the economy struggles to recover and millions of baby boomers stand at the brink of retirement.

New congressional projections show Social Security running deficits every year until its trust funds are eventually drained in about 2037.

This year alone, Social Security is projected to collect $45 billion less in payroll taxes than it pays out in retirement, disability and survivor benefits, the nonpartisan Congressional Budget Office said Wednesday….

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As a society, we’ve recoiled from a candid discussion of public and private responsibilities for retirement. The long-ducked question is how much government should subsidize Americans for the last 20 to 30 years of their lives. Social Security and Medicare have evolved from an old-age safety net into a “middle-age retirement system,” as Eugene Steuerle of the Urban Institute puts it. In 1940, couples reaching 65 lived an average of almost 19 years, Steuerle notes. Now, the comparable figure for couples is 25 years. For Americans born today, the estimate approaches 30 years.

Overhauling Social Security and Medicare has many purposes: to extend people’s working lives; to make them pay more of the costs of their own retirement, as opposed to relying on subsidies from younger Americans; to prevent spending on old-age welfare from crippling other government programs or the economy; to create a bigger constituency for cost control in health care. America’s leaders have tiptoed around these issues, talking blandly about limiting “entitlements” or making proposals of such complexity that only a few “experts” understand.

Just because this is an awful time to discuss these questions does not mean they shouldn’t be discussed. The longer we wait, the more acute our fairness dilemma grows. We can’t deal with it unless public opinion is engaged and changed, but public opinion won’t be engaged and changed unless political leaders discard their self-serving hypocrisies. The old deserve dignity, but the young deserve hope. The passive acceptance of the status quo is the path of least resistance – and a formula for national decline.

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Sadder, wiser, those of us gathered on the Washington Mall in the freezing morn of Mr Obama’s inauguration can see now that of all the brave, unsustainable hopes uttered by the new young president, the most unsustainable of all turned out to be his Biblical plea to “put away childish things”. He might as well have tried to legislate the word “dream” out of American public discourse. Dreams? Reality? It’s not even close, is it?

Whether fantasy will prevail over factuality, adolescent wishful thinking over maturity, will be the great political motif of the next few years. The omens are not auspicious….

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The global prosperity of much of the 20th century would seem to belie the pessimists, but I don’t think there is much doubt the moral authority of the West has dramatically declined in the face of the financial crisis. It has revealed deep fault lines within Western economies that have spread to the global economy.

The majority of Western governments are running fiscal deficits of 10 percent or more relative to GDP, but it is increasingly clear that there will be no quick fixes, that big government and fiscal deficits will not bring us back to the status quo ante. Indeed, the tidal wave of red ink has meant that the leverage-led or debt-led growth model is dead.

Developed countries will be forced to deal with their debt on every level, from the personal to the corporate to the sovereign. Being able to borrow may have made people feel richer, but having to repay the debt is certainly making them feel poorer, particularly since the unfunded liabilities that many governments face from aging populations will have to be paid for by a shrinking band of workers.

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The chairmen of President Obama’s debt-reduction commission have been unable to win support from any of the panel’s elected officials for their proposed spending cuts and tax increases, underscoring the reluctance of both parties to risk short-term political backlash in pursuit of the nation’s long-term fiscal health.

The chairmen of the commission ”” former Senator Alan K. Simpson, a Republican, and Erskine B. Bowles, a Democrat and former chief of staff to President Bill Clinton ”” delayed for two days, until Friday, a final vote by its 18 members.

They said the delay was to provide more time to look at the final package, but it also gave them further opportunity to woo some of the 12 members of Congress on the commission, six from each party, whose support will be critical if the plan is to be taken seriously as a blueprint for eventual legislation.

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Even as work continues to repair our financial infrastructure and get the economy moving again, we need urgent action to forestall the next financial crisis. I fear that one will start in Washington. Total federal debt has doubled in the past seven years, to almost $14 trillion. That’s more than $100,000 for every American household. This explosive growth in federal borrowing is a result of not just the financial crisis but also government unwillingness over many years to make the hard choices necessary to rein in our long-term structural deficit.

Retiring baby boomers, who will live longer on average than any previous generation, will have a major impact on government spending. This year, the combined expenditures on Social Security, Medicare and Medicaid are projected to account for 45 percent of primary federal spending, up from 27 percent in 1975. The Congressional Budget Office projects that annual entitlement spending could triple in real terms by 2035, to $4.5 trillion in today’s dollars. Defense spending is similarly unsustainable, and our tax code is riddled with special-interest provisions that have little to do with our broader economic prosperity. Overly generous tax subsidies for housing and health care have contributed to rising costs and misallocation of resources.

Unless something is done, federal debt held by the public could rise from a level equal to 62 percent of gross domestic product this year to 185 percent in 2035. Eventually, this relentless federal borrowing will directly threaten our financial stability by undermining the confidence that investors have in U.S. government obligations….

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Surprisingly, the chairmen overlooked the easiest route to reducing the deficits over the next decade: scaling back the costly budget that President Obama presented earlier this year. Much of the projected doubling of the national debt between 2010 and 2020 reflects the spending and tax proposals in that budget.

The Congressional Budget Office estimates that those proposals would, if enacted, raise the 10-year budget deficit by $3.8 trillion, even after taking into account the president’s proposed $1.3 trillion of new taxes on businesses and higher-income individuals. The $5.1 trillion gross cost of the Obama proposals reflects the cost of making the Bush tax cuts permanent for individuals with incomes below $250,000, of providing additional tax cuts for low- and moderate-income individuals, and of increasing spending on domestic programs.

As President Obama considers the bipartisan commission’s proposals and plans his next budget, he should begin by removing some of the $3.8 trillion of increased deficits that he proposed earlier this year. Financial markets and policy makers around the world want to see if the administration is as serious about deficit reduction as the American public.

Read it all.

This is a good exercize.

The [Deficit Reduction] report from the chairmen lists some of the best ways to raise revenue and cut spending. But it comes with no enactment strategy. In this climate, asking politicians to end the mortgage deduction and tax employer health care plans and raise capital gains taxes and cut benefits for affluent seniors is like asking them to jump on a buzzing sack full of live grenades. They won’t do it.

So we continue on the headlong path toward a national disaster. And along the way our dysfunctional political system will leave all sorts of other problems unaddressed: immigration, energy policy and on and on.

Yet, I’m optimistic right now. I’m optimistic because while our political system is a mess, the economic and social values of the country remain sound. My optimism is also based on the conviction that serious, vibrant societies don’t sit by and do nothing as their governments drive off a cliff.

Over the past few years, we have seen millions of people mobilize ”” some behind President Obama and others around the Tea Parties. The country is restive and looking for alternatives. And before the next round of voting begins, I suspect we will see another mass movement: a movement of people who don’t feel represented by either of the partisan orthodoxies; a movement of people who want to fundamentally change the norms, institutions and rigidities that cause our gridlock and threaten our country.

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A draft proposal released Wednesday by the chairmen of President Obama’s bipartisan commission on reducing the federal debt calls for deep cuts in domestic and military spending starting in 2012, and an overhaul of the tax code to raise revenue. Those changes and others would erase nearly $4 trillion from projected deficits through 2020, the proposal says.

The plan would reduce projected Social Security benefits to most retirees in later decades ”” low-income people would get higher benefits ”” and slowly raise the retirement age for full benefits to 69 from 67, with a “hardship exemption” for people who physically cannot work past 62. And it would subject higher levels of income to payroll taxes, to ensure Social Security’s solvency for the next 75 years.

But the plan would not count any savings from Social Security toward meeting the overall deficit-reduction goal set by Mr. Obama, reflecting the chairmen’s sensitivity to liberal critics who have complained that Social Security should be fixed only for its own sake, not to balance the nation’s books.

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It is undeniable that we are on the path to fiscal collapse. This decline will occur in two stages. First there is the decay as the swelling national debt wears away the economy’s foundations and commits more and more future income to foreign creditors. We are already in stage one.

In stage two a lethal combination of phenomena arises in quick succession: greater default risk, looming inflation, higher interest rates, declining growth, financial market instability, and an acceleration of government borrowing. They feed on each other. The economy heads on a downward spiral. Between stage one and stage two there is a tipping point. Experts know it will come, but nobody wants to predict when. (See below.) This article is about the slow economic decline of stage one. Next week part 2 will describe the hell of a full-blown fiscal collapse.

There is no question economics has failed us. The old paradigms have been made obsolete by the hard reality of the 2007-2009 financial crisis and soaring government debt. But some ideas can be salvaged from the wreckage.

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The Fed is essentially lending enough money to the government to fund its operations for several months, something called “monetizing the debt.” In normal times, this is one of the great taboos of central banking because it is seen as a step toward spiraling inflation and because it risks encouraging reckless government spending.

Read it all (my emphasis).

It is a very scary picture.

The problem with the business cycle under this analysis, you’ll notice, is not the bust ”” it’s the boom. That’s when the bad investment decisions are made, largely because political influence in the markets (housing policy, tax breaks, artificially cheap money and other interest-rate subsidies, risk subsidies, etc.) distorts economic calculation.

Which brings us back to the entitlements. It’s easy to say: Well, we’ll just raise the retirement age, or cut benefits, or means-test them, or raise taxes on the wealthy who receive them (which amounts to means-testing, but Democrats like that version better). And, yes, that probably is what we will do, eventually. But that does not get us out of the economic pickle: People have been making decisions for years and years ”” decisions about saving, investing, consuming, working, and retiring ”” based at least in some part on what are almost certainly faulty assumptions about what sort of Social Security, Medicare, and other benefits they will receive when they retire. When those disappear, a lot of consumption is going to have to be forgone ”” and a lot of capital dedicated to producing those goods and services for consumption will be massively devalued. Businesses will have to retrench, probably in a way that is more disruptive and more expensive than the housing-bubble recession necessitated.

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As if there weren’t enough hot-button issues for debate in the 2010 midterm elections, Social Security is emerging as another one.

Democrats have been taking the offensive, apparently hoping to use the issue to their advantage as they fight to maintain control of Congress. They’re emphasizing the program’s popularity among Americans, their commitment to protecting it, and their contention that Republicans want to change Social Security to its detriment.

Social Security’s 75th anniversary is Saturday, and Democrats have tied some of their efforts to that milestone. President Obama, for one, talked about Social Security during his weekly address on Saturday.

“We have an obligation … to safeguard Social Security for our seniors, people with disabilities, and all Americans ”“ today, tomorrow, and forever,” he said. “But what we can’t afford to do is privatize Social Security.”

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Paul Skidmore’s office is shuttered, his job gone, his 18-month job search fruitless and his unemployment benefits exhausted. So at 63, he plans to file this week for Social Security benefits, three years earlier than planned.

“All I want to do is work,” said Skidmore, of Finksburg, Md., who was an insurance claims adjuster for 37 years before his company downsized and closed his office last year. “And nobody will hire me.”

It is one of the most striking fallouts from the bad economy: Social Security is facing a rare shortfall this year as a wave of people like Skidmore opt to collect payments before their full retirement age. Adding to the strain on the trust are reduced tax collections sapped by the country’s historic unemployment ”” still at 9.5 percent.

More people filed for Social Security in 2009 ”” 2.74 million ”” than any year in history

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This year, the U.S. public debt is projected to reach 62 percent of the economy””up from 40 percent in 2008 and nearly double the historical average, according to recent Congressional Budget Office (CBO) estimates. The financial crisis and recession drove much of this debt swing, yet larger problems loom in the future.

By 2030, the CBO projects that debt will more than double to 146 percent of GDP.[1] The only good news, if it can be called that, is that the U.S. is not alone. Two recent studies by the International Monetary Fund (IMF) and the Bank for International Settlements (BIS) highlight the significance of the global debt challenge and stress the need for governments to aim higher than short-term deficit reductions. For the U.S., one of the most poorly positioned countries, addressing the long-term debt challenge must include prompt reform of Social Security, Medicare, and Medicaid.

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Just as workers in the private sector participate in Social Security in addition to any pension plan at their companies, most states put their workers in the federal program along with providing a state pension.

Maine and a handful of others, however, have long been holdouts, relying solely on their state pension plans. In addition, most states have excluded some workers ”” often teachers, firefighters and police ”” from the national retirement system and its associated costs, 6.2 percent of payroll for the employer and an equal amount for the worker.

Now, Maine legislators have prepared a detailed plan for shifting state employees into Social Security and are considering whether to adopt it. They acknowledge it will not solve their problem in the short term but see long-term advantages.

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And how might we pay for such absurd obligations? Here’s Cembalest:

* By 2020, the average EU country would need to raise its tax rate to 55 percent of national income to pay promised benefits
* The U.S. could fund its shortfall by doubling the 15.3 percent payroll tax on employers and employees (forever)
* Alternatively, the U.S. could reduce discretionary spending by 80%, on things like education, defense and environmental protection. Why so high? There’s not enough discretionary spending left (the OMB estimates that mandatory spending will make up 71% of government expenditures by 2016)
* Of course, the other option would be the printing press (inflation), which would be worse given how much would be needed

Read it all and take a careful look at those charts.

Battered by high unemployment and record home foreclosures, most Americans seem to have lost faith in another fundamental part of their personal finances: Social Security.

A USA TODAY/Gallup Poll finds that a majority of retirees say they expect their current benefits to be cut, a dramatic increase in the number who hold that view. And a record six of 10 non-retirees predict Social Security won’t be able to pay them benefits when they stop working.

Skepticism is highest among the youngest workers: Three-fourths of those 18 to 34 don’t expect to get a Social Security check when they retire.

The public’s views are more dire than the calculations of Social Security’s trustees. Last year, they projected the system would begin running in the red in 2016, as the Baby Boom generation retired, and the trust fund would be exhausted in 2037.

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Among the primary forces putting upward pressure on the deficit is the aging of the U.S. population, as the number of persons expected to be working and paying taxes into various programs is rising more slowly than the number of persons projected to receive benefits. Notably, this year about 5 individuals are between the ages of 20 and 64 for each person aged 65 or older. By the time most of the baby boomers have retired in 2030, this ratio is projected to have declined to around 3. In addition, government expenditures on health care for both retirees and non-retirees have continued to rise rapidly as increases in the costs of care have exceeded increases in incomes. To avoid sharp, disruptive shifts in spending programs and tax policies in the future, and to retain the confidence of the public and the markets, we should be planning now how we will meet these looming budgetary challenges.

—Federal Reserve Chairman Ben S. Bernanke in his testimony before the Committee on the Budget in the U.S. House of Representatives today

Yesterday was my 58th birthday. If I were a Greek worker I could retire. Although pension payments in Greece normally start around 61, special provisions allow anyone to retire at 58 if they have been in employment for 35 years. That, as it happens, is how long I have been at work. My index-linked pensions from the Greek Government would be worth 75 to 90 per cent of the average salary in the country, guaranteed for the rest of my life by the State.

If you want to know why Greece is going bankrupt and why the euro seems to be on the verge of disintegration, look no farther. The best argument I have ever heard for a break-up of the euro was this observation in a German newspaper: “The Greeks go on to the streets to protest against an increase of the pension age from 61 to 63. Does this mean that Germans should extend the working age from 67 to 69, so Greeks can enjoy their retirement?”

This, however, is not another article about self-indulgent Greeks and self-righteous Germans. The battle over bailouts in Europe is only a sideshow compared with the great social conflict that lies ahead all over the world in the next 20 years. This will not be a struggle between nations or social classes, but between generations ”” and it is a conflict that, in Britain, begins in earnest this year. The end of the Second World War in May 1945 marked the start of the baby boom, which lasted until the mid-1960s. Now, 65 years later, the corresponding retirement revolution is about to shake up our society, economy and political institutions.

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