Unresolved budget issues could harm economy, warns Dallas Fed’s Economic Letter
For immediate release: April 27, 2007
- Entitlement shortfall could threaten U.S. economic growth
- Unfunded liability for Medicare drug benefit exceeds Social Security shortfall
- Higher retirement age, lower cost of living adjustments among solutions
In “Fiscal Fitness: The U.S. Budget Deficit’s Uncertain Prospects,” senior economist Jason Saving explains that while U.S. budget deficits have been shrinking over the past few years, surging entitlements—especially the Medicare drug benefit—pose a serious long-term risk to the budget and could harm the economy’s growth rate.
“The unfunded liability for Medicare Part D alone—the drug benefit that took effect in January 2006—is greater than the entire Social Security shortfall,” Saving writes.“Dividing the $88.2 trillion [total unfunded liability] evenly among the 300 million people who live in the United States produces a per-person liability of about $290,000—more than five times the average household’s annual income.”
Saving says proposals for a higher retirement age, lower cost-of-living adjustments and a more progressive payroll tax could provide some relief for meeting entitlement obligations; however, he also points out that policymakers “must be mindful that some of these avenues will be more harmful to the economy than others.”
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