Financial Armageddon Grows Ever Closer

Like one of those movies where a comet is approaching the earth and will destroy all life on the planet unless some intrepid heroes from central casting find a way to destroy it first.   Here's an alarming article about Social Security's finances.   The takeaways:

• Since last year, the present value of Social Security’s long-term funding gap widened by $1.1 trillion. In one year. 
• Last year, the trustees reported that Social Security would be unable to pay all of its promised benefits beginning in 2037; now the expected default year is 2036.
• The year in which Social Security is projected to start running in the red—that is, the year in which it will start adding permanently to the budget deficit—advanced from four years in the future to one year in the past.

And here's an even more alarming article from the Wall Street Journal:

Washington is struggling to make a deal that will couple an increase in the debt ceiling with a long-term reduction in spending. There is no reason for the players to make their task seem even more Herculean than it already is. But we should be prepared for upward revisions in official deficit projections in the years ahead—even if a deal is struck. There are at least three major reasons for concern.

First, a normalization of interest rates would upend any budgetary deal if and when one should occur. At present, the average cost of Treasury borrowing is 2.5%. The average over the last two decades was 5.7%. Should we ramp up to the higher number, annual interest expenses would be roughly $420 billion higher in 2014 and $700 billion higher in 2020....

The second reason for concern is that official growth forecasts are much higher than what the academic consensus believes we should expect after a financial crisis. That consensus holds that economies tend to return to trend growth of about 2.5%, without ever recapturing what was lost in the downturn.

But the president's budget of February 2011 projects economic growth of 4% in 2012, 4.5% in 2013, and 4.2% in 2014. That budget also estimates that the 10-year budget cost of missing the growth estimate by just one point for one year is $750 billion. So, if we just grow at trend those three years, we will miss the president's forecast by a cumulative 5.2 percentage points and—using the numbers provided in his budget—incur additional debt of $4 trillion. That is the equivalent of all of the 10-year savings in Congressman Paul Ryan's budget, passed by the House in April, or in the Bowles-Simpson budget plan.

Third, it is increasingly clear that the long-run cost estimates of ObamaCare were well short of the mark because of the incentive that employers will have under that plan to end private coverage and put employees on the public system. Health and Human Services Secretary Kathleen Sebelius has already issued 1,400 waivers from the act's regulations for employers as large as McDonald's to stop them from dumping their employees' coverage....

Underestimating the long-term budget situation is an old game in Washington. But never have the numbers been this large.

The perfect storm, which could actually happen, is a combination of interest rates going up to more normal historical levels, anemic growth in the economy, and a brand new entitlement program about which no one knows what to expect, turning out (surprise!) to cost a lot more than the Washington bureaucrats told us it would cost.   The first one is undoubtedly going to happen at some point, and we need to prepare for it.   The second two can be avoided if we elect a Republican Congress and President and repeal Obamacare and, at the same time, lower taxes on individuals and businesses.   Then you might have a chance to get businesses hiring again.