2020: A Budget Odyssey ♦ Annual interest payments in 1990 dollars will reach $300 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. 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 surren 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.) 2020: A Budget Odyssey ♦ If that same worker were permitted simply to place his payroll taxes in an annuity with a six percent real rate of return, he would have a nest egg worth almost $800,000 (1990 dollars) at retirement age. This would allow the worker to draw a $60,000 benefit per year until death (assumed at age 80). That's about five times higher than what Social Security offers for the same level of investment. ♦ To state this another way: Workers just now entering the labor market will spend half their working years—that is up until the age of 45-paying Social Security taxes and receiving nothing in return for those contributions. Assuming a normal rate of return, a worker could start contributing the amount now paid in Social Security taxes into an annuity at the age of 45 and receive the same type of benefit that Social Security offers for paying into the system more than 20 years earlier. For today's young workers, then, Social Security isn't generational inequity; it's generational thievery. Is Doomsday Really on the Horizon? The analysis above shows what might happen if we leave government on automatic pilot. In reviewing the calculations in this chapter, it is tempting to conclude that surely our elected officials could not be that reckless and irresponsible. They must have the foresight and wisdom to realize that if government gets too much larger than it is today, we could be seriously imperiling our children's economic future. And if the current batch of politicians won't recognize this, then surely we the voters will replace them with intelligent people who do. Yet there are several reasons to suspect that the nation may disregard these caution signs: 1) Washington's Woeful Recent Fiscal Record. In the first six post-Reagan years, federal spending, taxes, and regulation have already grown by roughly one-third. Under George Bush and Bill Clinton the pace of federal government spending growth has resumed its 1960s and 1970s pace of expansion. In 1990 and again in 1993 the two largest tax increases in American history were enacted by Congress. Figure 1-7 shows projected spending and debt through 1998 under Clinton. 2) The Demographic Time Bomb. Without making major changes and fundamentally restructing entitlements, Congress may not be capable of controlling spending. The reason for this pessimism: The aging of the American workforce. Most of our entitlement spending today is directed toward the elderly. The percentage of the population over the age of 65 and eligible for Social Security and Medicare will double by the middle of the twenty-first century. In the year 2020 the number of Americans over 65 will climb to 40 million, up from about 30 million today. In 1970 there were roughly four workers for every retiree. In 1990 this ratio was three workers per retiree. By 2030, when the baby boomers are all retired, there will be only two workers for every Social Security recipient. By that year the feds will owe the baby boomers an estimated $10 trillion in promised Social Security payments, and perhaps as much in health care benefits. 3) A Government Hostile to Free Enterprise. A strong argument could be made that the most recent Congress was the most hostile to the free enterprise system that ever assembled in Washington. In 1991 and 1992 Congress proposed $8 of new spending for every $1 of spending reductions. Making matters worse, with Bill Clinton in the White House, no longer do taxpayers have a President willing to serve as a goalie guarding the federal treasuryswatting away new expensive and expansive congressional spending proposals. Nobel prize winning economist Milton Friedman was probably accurate when he recently lamented that |