Thursday, October 3, 2013

Pain: Now or Later?



    A number of years ago there was a television commercial that encouraged regular oil changes.  In it, a mechanic pointed to a car behind him that was having the engine overhauled and noted that failing to get regular oil changes can cause serious engine damage.  At the end of the commercial the mechanic said, “You can pay me now, or you can pay me later.”

    With the Administration and Congress once again at odds over raising our nation’s debt ceiling I keep wondering why no one in Washington seems to understand why doing so only makes the problem worse.  I understand that we can’t just suddenly stop doing everything that we’re doing.  Calling an abrupt halt to projects that are already in progress would do great damage to the economy.  I understand that.  But Congress isn’t just continuing projects they’ve already started; they are creating new ones and expanding others so that our debt problem gets worse instead of better.

    Whenever anyone suggests making cuts to existing spending, particularly to welfare, Medicaid, Medicare or Social Security, there is an outcry because it is easy to see how people will be hurt when cuts are made to these programs.  A similar claim is made whenever cuts are suggested to our spending on national defense.  No matter what cuts are suggested, we are told that those cuts will cause someone pain. 

    The problem with pain, as it relates to our spending, is that it is very much like that oil change commercial.  A little pain now will almost certainly save us from much greater pain later.  Why?  Because right now our nation spends about $3.5 trillion per year but takes in only $2.5 trillion in taxes.  Obviously, you can’t, in the long-term, spend more than you earn, everyone who has ever balanced a checkbook knows that, but Washington has been doing it (more or less continuously) for more than sixty years.   So far we’ve accumulated a national debt of $17 trillion dollars… and, as bad as that sounds, that’s the good news.

    We hear that our national debt is $17 trillion dollars but we are not told that this does not include the money that we “borrowed” from Social Security and Medicaid.  Every one of us has paid into Social Security for our retirement.  While all of the Baby Boomers were working, the surpluses from these deposits were immense… but they were never saved in any kind of “savings account” or “lockbox.”  Instead, to cover the growing deficits our elected representatives… spent them.  Because we borrowed the money from ourselves, this spending isn’t really considered part of the national debt, but when the Baby Boomers retire they will, naturally, expect to collect from the system they paid into.  How much do we owe them?  At present, our borrowing from Social Security and Medicare amounts to an additional $85 to 95 trillion and our expected payments for the national prescription drug benefit add another $20 trillion.  All together that comes to an astounding $125 trillion in debt.  (That works out to over a million dollars in debt for every U.S. household!)

    Here is where things get ugly.  If we assume that over the next forty years, everyone who is currently working will retire, then we will have to repay most, if not all, of that debt over that same forty year period.  I know the math is more complicated than that, but this oversimplification will get us close enough to see the problem.  If we think of this as paying down a mortgage, we have forty years to pay back $125 trillion in debt with an annual “income” of $3 trillion. 

Do you see the problem?

In order to repay $125 trillion in 40 years, our annual payments will exceed our current income.

    If we start right now, and we could somehow stretch those payments out for a hundred years, we would still have to repay $1.25 trillion per year.  That would seem reasonable, but if we first balance the budget (so as to stop borrowing even more money while we were paying off our debt), we would still have to cut our current spending by fifty percent!

    Worse, none of this is theoretical.  This is money that we have already spent and which must be repaid.  Because we borrowed most of it from retirement plan, failing to pay it back will mean that Social Security checks don’t go out and retirees’ medical bills don’t get paid.  We complain that making small cuts causes pain, but how much pain will there be if we default and those checks don’t go out at all?

As the man said in the commercial, “You can pay me now, or you can pay me later.” 

Either way, there will be pain.  The longer we put it off, the worse it will be.

Our only choice is whether we want to experience pain now or worse pain later.


2 comments:

  1. The political class spends other people's money. They are not concerned. Someone else will pay the bill. Current recipients are current recipients. They are not concerned. someone else will pay the bill. Children and grandchildren playing in the yard and park are children and grandchildren. They don't know to be concerned. But, they will be stuck paying the bill.

    The greatest generation along with the hippies of the 60's and the wall street banksters have together trashed this nation. The day will come when the children and grandchildren of today will rise up and call all of us exactly what we are... thieves and robbers and selfish wastrels . We have stolen what should have been their future and selfishly wasted it upon ourselves.

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  2. Asking (or requiring) our children and grandchildren to pay for our lives of excess is, to me, unquestionably immoral. That is just another reason why we should bear the pain of getting our financial house in order sooner, rather than later. For ourselves, the birds may come home to roost in a very unpleasant way. What will happen to the Baby Boom generation twenty or thirty years hence when there isn't enough money to pay our benefits and the children whose future we squandered must choose whether or not to let us live with the mess we've made?

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