Be Afraid, Be Very Afraid

In a front page story in USA Today, on May 29, Dennis Cauchon laid out the stark picture of how deep a hole Congress has dug for all citizens of the US. The net present value (NPV) of all the commitments that Congress has made added up to $546,668 for every household in the country in 2008. That was an increase of $55,000 or 12.0 percent per household.

The total NPV was $63.8 trillion at the end of last year. That dwarfs our $14.3 trillion in GDP in 2008 and is 23.9 percent larger than the $51.5 trillion in net worth held by consumers on December 31, 2008.

By far the biggest problem is Medicare. It accounts for $284,288 or 52.0 percent of the obligation per household. Social Security is second at $160,126 or 29.3 percent. The two entitlement programs combined account for $444,414 or 81.3 percent of the total.

There are no simple and obvious solutions or Congress would have used them by now. One possibility is a flat tax on consumption with a cap on total spending for Medicare. Social Security can be solved by raising the retirement age in the future (ten years or so from the change) and indexing the annual increase in benefits to wages rather than prices.

The national debt accounts for only $54,537 per household. That part is manageable.

The debate on how to resolve this huge gap between commitments and reserves to pay for them will consume increasing amounts of time until the situation is resolved. That is unlikely to be soon. Sadly.