Is America about to go broke?

By Scott Burns

Prices dropped last year. But we still need to invest to protect ourselves from inflation. That's why our retirement-plan investing needs an inflation "tilt." You'll understand why in a few paragraphs.

How bad will future inflation be? I don't know. Neither does anyone else. It could be a normal inflation of 3% to 4% a year. It could also be a banana-republic 10% a month.

What we know is that all governments make promises they can't fulfill. Our government certainly has. Under both political parties, it has taken promise making to a high art. This is not hyperbole. The figures can be found in regularly published government reports.

Much worse than you probably think

The figures exist, but they are ignored. News reports regularly inform us of the growing federal deficit, projected at a stunning $1.75 trillion for fiscal 2009 and $1.17 trillion for 2010. But regularly reported, less visible government obligations have been growing much faster.

In the four years from January 2004 to January 2008, the Medicare trustees reported that the unfunded liabilities of Social Security and Medicare grew by a stunning $10.4 trillion. The average annual growth topped $2.5 trillion.

That was well over the expected formal deficit of $1.75 trillion this year.

In the 2008 trustees' report (.pdf file), the unfunded liabilities of Social Security and Medicare -- promises of future retirement and health care benefits -- total $42.9 trillion. In a few days, we should be able to read the 2009 report. It's a good bet that the unfunded liabilities will show an increase in the new report.

Ironically, payroll tax payments are still large enough that the Social Security and Medicare programs don't need every dime. The extra money goes into the program trust funds as Treasury debt. The actual cash is spent elsewhere. Basically, the employment tax has been subsidizing other federal spending. This has been going on since the 1983 "reform" of Social Security, a disaster chaired by Alan Greenspan, later the Federal Reserve chairman.

Today's deficits? That's nothing

Last year's Social Security trustee report estimates that OASDI (Social Security retirement and disability) and HI (hospital insurance), excluding book entry interest for the trust funds, will have more revenue than expenses until 2015. If higher cost assumptions prevail, however, the last year of positive flow will be 2010.

That's next year.

I am not making this up. It is public record. You can see for yourself by examining table VI.F9 on page 191 of the 2008 trustees' report.

When Social Security and Medicare costs exceed their revenues, the Treasury will have to borrow money to cover the shortfalls. When that happens, today's stunning deficits will look small.

That's why our future contains inflation, not deflation.

Continued: The upside-down nation

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