Earlier this week, the trustees for Social Security and Medicare issued their latest annual report warning of the impending financial catastrophe when the federal government must pay out more in benefits it has promised under the two entitlements than it collects in taxes to pay for the programs. Medicare ran out of cash to pay for hospital benefits last year and now these costs are covered by the U.S. Treasury. By 2017, according to the trustees, Medicare will have exhausted all of its trust funds. Social Security will run dry in 2016. The approach of these doomsdays has accelerated in the past year because of the slow economy and the refusal of Washington politicians in both parties to face reality.
The trustees have been warning about the coming entitlement crisis for years. President George W. Bush tried in 2005 to mount a campaign to persuade Congress to reform Social Security. But Bush’s heart really wasn’t in it, if only because then-Senate Minority Leader Harry Reid made it clear that congressional Democrats would do what they had always done whenever the issue came up for discussion – scare America’s seniors by claiming those evil Republicans were again trying to take their Social Security away from them. Back then, Reid even went so far as to deny the obvious fact of an entitlement crisis: “Today’s report confirms that the so-called Social Security crisis exists in only one place — the minds of Republicans. In reality, the program is on solid ground for decades to come.”
Now President Obama, aided by Reid and House Speaker Nancy Pelosi – has launched the federal government on the biggest deficit spending spree in human history. The federal government will spend at least $3.6 trillion in 2010, with an estimated $1.8 trillion of it borrowed, mainly from overseas creditors like China. Which brings us to the nub of this situation: Former Comptroller General David Walker noted earlier this week in The Financial Times that two years ago, Moody’s threatened to reduce the federal government’s Triple A rating. Doing so would significantly increase the cost of borrowing for the government. Moody’s stayed its hand then, but it’s difficult to see why it will wait much longer to drop the other shoe. China has warned the U.S. that its willingness to fund our deficits is not unlimited. And Washington is having to offer higher interest rates in order to attract sufficient buyers willing to buy more of the bonds needed to finance the deficit. In other words, financial reality is beginning to crash down on the heads of America’s leaders.