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2020: A Budget Odyssey

Total federal liabilities will surpass $20 trillion by the end of the century. This will represent a debt of almost $300,000 for every family of four in the U.S.

Entitlement spending health care, Social Security, and income security-will continue to undergo explosive growth. Figure 1-2 shows that outlays will reach nearly $1 trillion (1990 dollars) by the year 2000 and $1.4 trillion in 2010, or just less than is spent on the entire federal budget today. By 2020 entitlements alone will consume the same share of GDP as the entire budget does today.

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Real spending on domestic discretionary programssocial services, community development, science and space, and so on-will double in ten years and quadruple in twenty years, as they did in the 1950-1991 period. By 2020 total discretionary domestic programs will consume roughly twice the level of GDP that they do today.

◆ The fastest growing areas of the domestic, non-entitlement budget will be education and social services spending. These programs will see their budgets rise tenfold in real dollars over the next 30 years-up from $48 billion to $500 billion.

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How will Congress pay for this orgy of new spending? Debt and taxes, of course.

Over the post-World War II period federal taxes have averaged roughly 18.5 percent of GDP. Today taxes consume roughly 19 percent of GDP. Let's assume that federal taxes rise steadily to 25 percent of GDP by the year 2020. This would constitute a federal tax burden much higher than ever before in peacetime. Under this scenario the deficit would still skyrocket to nearly inconceivable levels early next century. Figures 1-3 shows:

The deficit in 1990 dollars will swell to over $300 billion by
2000, $600 billion in 2010, and $1.4 trillion by 2020.
The deficit alone in 2020 will be as large as the entire
1992 budget, $1.4 trillion.

♦ The deficit will reach 5.5 percent of GDP in 2000, 8 percent of GDP in 2010, and 16 percent of GDP in 2020.

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If the deficit climbs to these forecasted levels, then clearly interest expenditures-what we pay to finance the national debt-will also skyrocket over the next three decades. Figure 1-4 underscores the magnitude of the crisis:

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2020: A Budget Odyssey

Annual interest payments in 1990 dollars will reach $300 billion by 2000 and a staggering $760 billion by 2020. Real interest payments will grow by nearly five percent per year for the next thirty years-or two-and-a-half times the expected rate of real economic growth over this period. ♦ Nearly one of every six dollars that Uncle Sam spends will go toward paying interest on the national debt.

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An alternative to running these massive deficits would be for Congress to attempt to balance the budget by simply raising taxes to match annual spending. As Figure 1-5 shows, this would require tax burdens to rise to almost unthinkable levels:

On average, by 2020, the average American worker would pay $26,600 (in 1990 dollars) in federal taxes. ♦ Federal taxes as a share of worker income would have to rise by 20 percent above current levels by 2000; 75 percent above current levels by 2010; and roughly two-and-a-half-times the current levels by 2020. One-third of all worker income would be taken by the federal government in 2010 and more than 40 percent would be seized in 2020. With state-local taxes, the government's take could rise to 60 percent of middle-income worker paychecks by the third decade of the twenty-first century.

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One way to measure future tax burdens on American citizens is to examine the percentage of lifetime income that future generations of workers will pay in taxes. As Figure 1-6 indicates, as government has grown over this century, this percentage has steadily risen from 24 percent in 1900 to an expected 36 percent for those born in 1990. For children born in the next century, however, the continued expansion of government, plus the huge cost of servicing the $5 trillion debt largely built up over the past twenty years mean that this share of lifetime earnings surrenFigure 1-6

[graphic]

Share of Lifetime

45%

Income Paid as

40%

Taxes

Source:Laurence

30%

Kotlikoff and Allen

Auerbach, U.S. Savings

Crisis, prepared for

20%

Merrill Lynch, 1994.

+ 1900 1910

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1970 1980 1990 Future

2020: A Budget Odyssey

dered to taxes is expected to accelerate, reaching as high as 82 percent. Because of the large reliance on borrowing to pay for government, the typical American now pays about 75 cents for every dollar of government benefits received. But in the next century, as this debt gets paid off, Americans could be paying about $1.25 for every dollar of government services received. If Americans now think that government is a waste of money, just think how our kids, and our kids' kids will feel when nearly one-fourth of their tax dollars go to pay the interest on spending that occurred many years previously.

Social Insecurity

Adding insult to injury for young workers and those who have not yet even entered the workplace are the dire financial straits of Social Security. In early 1994 federal officials conceded that the Social Security Administration will run out of money by 2029-seven years earlier than previously thought. This time bomb will explode right smack in the middle of the retirement years of most baby boomers and well before post-baby boomers are eligible to receive a penny of benefits.

Sadly, even that projection is absurdly optimistic. By 1999 the combined Social Security and Medicare trust funds start spending $8 billion a year more than will be collected in payroll taxes. And that annual deficit will soon thereafter mushroom to more than $100 billion. Since the surpluses of the 1980s and 1990s have already been spent by Congress on everything from maple syrup research to pornographic arts subsidies to nuclear submarines, the program is in much worse shape than anyone in Washington cares to admit.

Few Americans appreciate just how awful an investment Social Security is for those now entering the workforce the MTV generation. The post-baby boomers will be asked to pay a massive payroll tax burden in exchange for a meager retirement benefit. Here are the grim calculations:

♦ A worker just now entering the labor force with an average starting salary of $22,500, and with a normal lifetime earnings path, is expected upon retirement to receive a Social Security benefit of about $12,500 per year (1990 dollars). (This, of course, optimistically assumes that the program is still around in 2040.)

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