Federal Reserve Chairman Ben Bernanke was unusually grumpy addressing Congress during his latest testimony before the Joint Economic Committee on Wednesday. As the Washington Post‘s Ezra Klein and Even Soltas put it, he seemed to have “an itemized list” of everything lawmakers are getting wrong.
His main grievance: Congress has been doing some short-term belt-tightening, while the economy is still struggling, but hasn’t lifted a finger to address the much more serious issue of long-term deficits and runaway pension and health care costs. The U.S. took a stab at reforming its Social Security program, the public pension system, back in 1983, he said, and many of the measures adopted back then are still being phased in. “For some of these things,” he noted wearily, “very long lead times make [things] much easier.” The unspoken message: You guys are already way late in tackling the problem.
According to the Congressional Budget Office, the federal deficit will shrink to a nice 2% of GDP in 2015, but start climbing back up around the end of the decade as baby boomers retire, health care gets ever more expensive and the cost of servicing the government’s massive debt increases along with interest rates. According to the latest government estimates, the gap between Social Security expenditures and incoming funds from payroll taxes, currently at around $66 billion, will rise sharply starting in 2018. Medicare, the public health insurance for seniors, is slated to hit the wall even faster. This leaves Congress and the White House only a handful of years to reform pensions and health care before costs skyrocket.
That’s like having 15 years rather than 40 to build up your retirement. Of course, you can make it—if you have a healthy income and feed on insects for rest of your working life. But it’s not what financial advisors recommend.
Even if Democrats and Republicans were able to produce bipartisan legislation on Social Security and Medicare by the end of this year, they’d have to embrace some pretty painful adjustments, in terms of either higher taxes, smaller benefits or a combination of both. Keeping Social Security solvent for 75 years, for example, would have required a 2.2 percentage point increase in the payroll tax rate starting in 2011. Starting one year later, the required increase jumps to 2.7 percentage points, government estimates show. It only gets worse going forward.
And, of course, the more painful and abrupt the adjustment gets, the more it will weigh on future growth.
Erica Alini is a California-based reporter and a regular contributor to CanadianBusiness.com, where she covers the U.S. economy. Follow her on Twitter: @ealini.