Budget guru sees ‘super-subprime crisis’

NEW YORK - This election cycle, msnbc.com is presenting a weekly series, Briefing Book: Issues '08, assessing issues and controversies that the next president must confront.

This week, we look at the massive burden which future taxpayers must carry to redeem the promises Congress made in creating the Medicare and Social Security entitlements.

Why it’s a problem
The former head of the government’s in-house watchdog agency warns of the seriousness of the entitlement issue, saying it's a problem that could dwarf the nation's subprime emergency.

“I think we have the makings of a super-subprime crisis dealing with the federal government’s finances, and we need to defuse it,” said David Walker, former chief of the Government Accountability Office.

Government accountants estimate that, in the long-run, imbalance between federal spending promises and expected revenues is about $54 trillion in today’s dollars.

This is largely the result of two programs geared toward senior citizens, Medicare and Social Security.

Thanks to escalating medical costs and a large population of retiring baby boomers, a shortfall equivalent to roughly $470,000 per American household has been created.

Walker, a former trustee of Social Security and Medicare who now leads a foundation devoted to raising awareness of these issues, says we're just beginning feel the effects: “This is the tip of the iceberg.”

While neither Barack Obama nor John McCain have made this issue a central theme of their campaigns, the candidates, along with their advisers, acknowledge its severity.

Video   Social Security solution? June 13: Campaigning in Ohio, Sen. Barack Obama says that he'd impose the Social Security payroll tax to all annual incomes above $250,000. NBC News Web Extra

Where the candidates stand
McCain “recognizes that the U.S. government will not achieve and maintain fiscal balance until we address the long-run spending in these two programs,” his chief economic adviser, Doug Holtz-Eakin told msnbc.com.

“The fiscal situation is serious. In the short run, what we need to do is stop digging the hole any deeper,” said Jason Furman, Obama’s economic policy director.

To help shore up Social Security, Obama has proposed a payroll tax increase on people making more than $250,000 per year. The tax currently applies only to the first $102,000 of income.

Last October, Obama described this tax increase as a way to make sure that "the wealthy are paying more of their fair share."

Furman said Obama hasn’t taken any potential fixes off the table, but that he is opposed to program changes that would lower benefits, including proposals to raise the retirement age.

He is also opposed to having private accounts supplant Social Security.

On Medicare, Furman said Obama believes that reforms can’t be done effectively apart from a larger health care overhaul. “So what you need to do is put in place a set of ideas that would slow the growth of health spending economy-wide,” he said.

According to Furman, Obama would encourage health providers to use electronic medical records, rather than paper, to help reduce administrative costs.

He would also create an executive branch office to conduct comparative effectiveness research, helping to facilitate a change in the way medicine is practiced.

Holtz-Eakin said McCain, who currently receives Social Security benefits, is unlikely to offer a specific proposal to change the program during the campaign.  

Video   McCain’s tax reversal July 29: Despite having insisted that he'd not seek tax increases as president, John McCain recently said, "everything is on the table," including a Social Secuirty tax hike. CNBC's John Harwood assesses McCain's tax stance. Countdown

“It is a very specific proposal that would polarize the debate,” he said of the payroll tax.

McCain, who earlier this year said the way Social Security is funded is a “disgrace,” does favor one specific change: He backs the creation of private accounts, which he would like to see added on top of the current system.

As for Medicare, Holtz-Eakin said McCain would emphasize changes within the program to produce quality care at a lower cost.

“Medicare reforms can have a dramatic impact on the practice of medicine,” he said. “You can use Medicare as a tremendous lever.”

McCain would use Medicare to get more doctors to focus on disease prevention and to better coordinate efforts among different medical specialists, Holtz-Eakin said.

McCain also supports using Medicare to negotiate large-scale savings on prescription drugs.

Unanswered questions
With the U.S. economy sputtering, will Americans have an appetite for changes to these massive entitlement programs? Are they open to having their taxes raised or benefits cut during a time of economic hardship?

“We can turn this around with leadership,” said Walker. “But we’re also going to have to recognize that the regular order, the regular way of doing business in Washington is broken.”

Will anything short of a major crisis force Congress and the president to act? Is Washington even capable of dealing with such long-run problems?

Video   McCain, Obama at odds over Social Security reform Oct. 2: At its current rate, analysts say Social Security will run out of money by 2041. As NBC’s John Yang reports, both candidates are proposing dramatic – and drastically different – changes to the program. Nightly News

President Bush failed in spectacular fashion when he tried to overhaul Social Security in 2005, with McCain acting as one of his plan's most prominent backers.

“Leadership is only going to come from somebody using the bully pulpit to create a mandate, so this is the opportunity for leadership,” said Maya MacGuineas, director of fiscal policy at the New America Foundation and an adviser to McCain’s 2000 presidential campaign.

“Otherwise, a crisis is what it will take. And that’s a real problem, because Wall Street is short-term focused,” she said. “The financial markets will make us deal with it, but it will be too late when they do.”

One of the great unknowns is how fast health care costs will grow in the coming decades.

Experts say rising health care costs are driving the long-run fiscal gap even more than demographics. Will these costs keep rising at double the rate of inflation or will they settle down?

“If there is one thing that could bankrupt us, it is health care costs,” Walker said. “We are the only country in the world that writes a blank check for health care, and that is mindless and it must end.”

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