THE BLOG
01/21/2014 03:33 pm ET Updated Mar 23, 2014

Pay or Print?

Any day now, the issue of our national debt ceiling will take center stage again. Our national debt is now well over $17 trillion dollars, but no one seems really worried about repaying it. The world continues to take our IOUs - Treasury bills, notes and bonds - at a very low rate of interest.

Our national debt is actually hugely understated, according to www.TruthinAccounting.org. Their figures also include promises we've made for future payments, such as Social Security, Medicare, and government retirement benefits. If all of those obligations are included, they say our National Debt is over $75 trillion!

Those numbers make your eyes glaze over. It's a topic we leave to economists, or politicians, or future generations -- a mental and financial deferral has worked for many years. But now those problems are upon us.

It is unthinkable that the United States would default, either to our lenders or our citizen-voters who are expecting payment. So some adjustments will be made, and they will be painful. Our only other choices are to grow our economy to bring in revenue, or resort to "printing" the money to make good on those promises.

It's worth facing the facts on our four key challenges.

Social Security Disability

The Social Security Disability Income fund is a part of the Social Security system. But it's a separate fund, designed to pay a monthly income until disabled workers are old enough to collect social security benefits on their previous work record.

The SSDI fund is running out of money -primarily because of the huge increase in people claiming disability during these hard economic times. You probably read about the scandal of some New York police and fire personnel fraudulently claiming disability, resulting from events on 9/11. But that's only the very public tip of the iceberg that is sinking the SSDI fund.

There is now one person collecting disability in this country for every 13 people working full time! Just 45 years ago, there were 51 people working full time in this country for every person collecting disability. In fact, a veritable legal specialty has arisen to guide people through the relatively simple process of making a disability claim.

Many disabled people really need the help. But because of the ease with which malingerers can collect, it's expected that the SSDI fund will likely run out of money by 2016!

Then, the choice will be between cutting benefits for those who receive them - or dipping into the main Social Security Trust Fund to pay disability claims. And that brings us to the next huge crisis.

Social Security

Despite the 1983 reforms, which promised to build a large surplus in the main Social Security Old Age and Survivors fund just in time for the Baby Boomer retirement wave, the main Social Security trust fund is also on shaky ground. The Trust Fund report predicts depletion of the fund's assets in 2033.

The big problem is that the "surpluses" in the trust fund are combined with the entire Federal budget - and the net result is a lot of red ink. Despite the actuarial surpluses in Social Security, the Federal government has been in the red by at least $1 trillion dollars every year for the past five years until fiscal 2013, which produced a deficit of "only" $642 billion.

The Social Security trust fund actually holds $2.3 Trillion of "special purpose" Treasury notes - IOUs that it will cash in with the Federal government in order to pay promised benefits in the future. But where will the government get that cash to redeem the bonds? Either from more borrowing - or from money printing.

What other choices do we have to pay future benefits? Social Security is critical to most of today's seniors, and will be even more important to future boomer retirees. One-third of today's seniors depend on Social Security for 90 percent of their income. And nearly two thirds of seniors currently depend on Social Security for at least half their income.

There are two likely and logical solutions - and they will be making headlines soon, probably after the fall elections. First, the "wage cap" is likely to be scuttled. Workers will pay into Social Security on every dollar they earn - above the current limit of $117,000.

And second, Social Security payments are likely to be "means-tested." Until the 1983 reforms, Social Security benefits were tax-free. Since then, those making more than $34,000 on a single return (or $44,000 on a joint return) know that up to 85 percent of their Social Security benefits may be taxable.

The ultimate concept of "means-testing" goes beyond the taxation of benefits based on income. It is likely to include an assessment of all your assets - much as applicants for Federal student loans must reveal not only family income, but assets and savings, on the FAFSA form.

Yes, my blood is boiling too. But this is my assessment of the changes most likely to be in the offing. Those changes would to pit seniors against their children and grandchildren, creating "generation warfare." And there's another huge oncoming financial crisis, one that dwarfs the problems with Social Security.

Medicare

It's estimated that Medicare faces an unfunded liability of between $23 trillion and $80 trillion - a disaster even at the low end of the range.

We have already made Medicare premiums income-tested. The program looks at your income for two previous years to determine your monthly premium. And while low income people pay $104.90 a month, people recently retired from good-paying jobs, or those who saved and have other retirement income, pay as much as $335 a month in Medicare Part B premiums.

Already, the cap on the Medicare tax has been eliminated, and the tax rate increased, to get more money going into the system. And on the cost side, the Medicare program is already being squeezed. Medicare Advantage programs which cover all costs, including prescription drug benefits, for one monthly fee ( but limit seniors to physicians and hospitals within a specific program), are already facing cutbacks in reimbursements from the Federal government.

And physicians participating in traditional Medicare are struggling with low reimbursement rates. It's not hard to envision doctors declining to serve Medicare patients - or asking for an annual "concierge fee" in addition to standard Medicare reimbursement.

But squeezing more out of Medicare is not going to solve its problems. One huge target: It's estimated that the final year of Medicare coverage represents 25-30 percent of Medicare's total spending. Can you envision a time when Mom or Dad will have "used up" their allotment of care, and are placed into hospice instead of getting another stint or kidney dialysis? Unless you, their children, want to pay?

Fixing Medicare demands attention to some frightening alternatives: Raising taxes, cutting reimbursement, limiting care - or "printing" the money to pay the Medicare bills.

Public Pensions

There's one more financial cloud overhanging the American economy. It's the estimated $4.1 trillion in unfunded public pension liabilities. While private pensions may be covered by the Pension Benefit Guarantee Corp (but only up to payments of about $60,000 per year in 2014), there is no such guarantee for public pensions.

Litigation over Detroit's municipal bankruptcy is throwing state constitutional promises of guaranteed pensions into limbo. The courts will decide of retired public workers in Detroit are protected, or are general creditors of the bankruptcy estate.

Unlike the Federal government, states cannot "print" the money to keep their pension promises. Will they go hat-in-hand to Washington for a bailout? And how will that money be found? Or will it be "printed?"

The bottom line of all these promises is that they can only be kept if the economy grows enough to generate tax revenues and create jobs. That would require a sensible taxation and regulation system - and incentives to create jobs. But we must start to recognize the problem and take action now.

Since no politician will accept the liability of defaulting on these promises - from Social Security to Medicare to public employee pensions - we have to consider the likelihood that they will turn to the "printing presses" and simply create the money to keep the system going.

If that happens, any money you have saved to pay your own way will be worth less and less in buying power. That's The Savage Truth.