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The Entitlement Cliff not the Fiscal Cliff that threatens the USA

Much is being said about the Fiscal Cliff looming at the end of the year, when tax cuts are set to expire and automatic spending cuts begin, but that is s drop in the ocean compared to the Entitlement Cliff looming for the country in coming years, a new report warns.

Entitlement spending is already so high that the cost of all entitlement programs + interest on the debt is nearly equal to total federal revenue, meaning that virtually everything else the government does is being paid for with borrowed money, the report from the Institute for Policy Innovation disclosed Thursday.

US entitlements include Social Security, Medicare, Medicaid, and means-tested welfare programs, plus veteran benefits, unemployment pay, disability pay, and more.

Many of these programs have grown substantially since President Obama took office. Medicaid has grown from 46.9 recipients to 56-M, disability beneficiaries have increased from 7.5 to 8.8-M, and the Food Stamp program has grown from 32-M beneficiaries to 47-M.

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More than 120-M Americans receive entitlements of some kind, according to the Institute, a Texas-based think tank. Add to that an estimated 16-M new Medicaid beneficiaries resulting from Obamacare, and some 18-M people who enter the health insurance exchanges beginning in Y 2014.

The bottom line: for F-Y 2012, the US federal government spent about $2.2-t of its $3.7-T budget on entitlement programs, while gross annual revenues stood at $2.6-T. Add interest on the federal debt of $220-B to the entitlement payout, and that leaves less than $200-B to pay for everything else, including defense, transportation, education, and homeland security. So the government makes up the shortfall by borrowing, or printing, money.

The problem will only get worse in coming years. Since Y 1980, Medicare and Medicaid have grown at more than 9% annually, and an estimated 77-M baby boomers are beginning to retire and collect Social Security.

At the same time, the pool of workers who pay for these programs is not growing. The Tax Policy Center reports that only 53% of households now pay both income and payroll taxes.

The Institute says: “Attempting to collect enough money to sustain this level of entitlement spending will only result in a reduction in work effort, reduced employment opportunities, and more people moving onto entitlements.”

The Institute offers several steps necessary to deal with the growing entitlement problem. One way is to reform entitlements into real safety-net programs that help those most in need and do not encourage continued reliance on welfare.

Another is to encourage economic growth by lowering personal and corporate income tax rates while eliminating loopholes, and lowering taxes on investment income. Also, several programs could be transitioned into pre-funded personal accounts.

The Institute’s conclusion: “Any solution that maintains the current defined-benefit structure, unless it is for a small number of the poorest Americans is only postponing the inevitable financial day of reckoning.”