The Global Budget Race: The Great Recession Drove Home a Reality Americans+ Have Long Avoided. an Aging Nation with Mounting Health and Retirement Bills Must Make Hard Choices or Be Outrun by Its Competitors-Some of Whom Have Been Quicker to Face Facts

By Besharov, Douglas J.; Call, Douglas M. | The Wilson Quarterly, Autumn 2010 | Go to article overview

The Global Budget Race: The Great Recession Drove Home a Reality Americans+ Have Long Avoided. an Aging Nation with Mounting Health and Retirement Bills Must Make Hard Choices or Be Outrun by Its Competitors-Some of Whom Have Been Quicker to Face Facts


Besharov, Douglas J., Call, Douglas M., The Wilson Quarterly


NEWS STORIES REGULARLY REMIND US THAT most national governments in the developed world are essentially insolvent. The United States has one of the worst balance sheets, with a projected debt in 2050 of $123 trillion. Of course, what can't happen won't happen, as economist Herbert Stein taught us. Long before that point, most countries will get their finances in order--either after a careful analysis of the alternatives or because they will be unable to borrow money and will be forced to take corrective action. How capably they respond will determine their future economic competitiveness and their standard of living.

Those countries that do a better job of bringing revenues and spending into balance--in a way that fosters a healthy and productive citizenry--will have a competitive advantage in the global economy, and they may be able to avoid economic decline.

Whether they know it or not, the developed (and emerging) nations of the world are in a race--not, one hopes, a race to the bottom, but rather a race to develop more economically efficient tax and social welfare policies while maintaining an effective social safety net. As in any race, learning from your competitors can be caudal to doing well. Around the world, countries are trying different approaches to solving the same long-term budgetary problems.

The accruing national debts are truly staggering. In a report earlier this year that reflected the catastrophic impact of the recent recession on national balance sheets, the Congressional Budget Office (CBO) estimated that in 2050 the U.S. gross debt will reach about 344 percent of the nation's gross domestic product (GDP). That's up from an already alarming estimate of 292 percent before the recession. (State and local liabilities, in the form of unfunded pension and health costs, would add trillions of dollars more.) As of the last year, in 2050 France's debt was projected to roach 337 percent of GDP, Germany's 221 percent, and Britain's 560 percent.

The root of the problem is the same in most countries: With populations aging, the intergenerational transfer system that has paid for pensions and health care is breaking down. Low birthrates and longer life spans are changing the balance between workers and retirees so that current levels of taxation cannot support the promised benefits. Across the developed and, increasingly, developing worlds, worker-to-recipient ratios are declining. By 2050, the U.S. Census Bureau estimates, there will be only 2.7 American workers for each retiree, down from 4.7 in 2008. The European Union nations will have only 1.8 workers per retiree, and Japan 1.3. China faces the biggest adjustment, dropping from about 7.7 workers per retiree to 2.1.

[ILLUSTRATION OMITTED]

As a result of these demographic changes, many government pension and health care systems for the elderly worldwide am now little more than Ponzi schemes that are running short of new "investors" Aggravating the budget situation is the rapid rise in health care costs caused by the development of new--and expensive--medical technologies, drugs, and treatment procedures.

The math is simple: Projected tax revenues am not nearly sufficient to cover future obligations--with the imbalance growing over time as larger shares of the populations in these countries begin to receive benefits. The U.S. Social Security and Medicare trust funds am giant and growing IOUs from the federal government to future recipients. Last year, the government "owed" the trust funds about $4.3 trillion. (These IOUs am dutifully printed at the Bureau of the Public Debt in Parkersburg, West Virginia, and placed in a filing cabinet. Not exactly Al Gore's lock box.)

Years ago, budget watchers warned that the so-called wealthy countries of the developed world had erected unsustainable social welfare systems. The predicted crisis, however, was decades in the future, so neither politicians nor voters were prepared to make tough choices. …

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The Global Budget Race: The Great Recession Drove Home a Reality Americans+ Have Long Avoided. an Aging Nation with Mounting Health and Retirement Bills Must Make Hard Choices or Be Outrun by Its Competitors-Some of Whom Have Been Quicker to Face Facts
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