Western governments have developed unfunded social insurance programmes where retiree benefits are paid for from the taxes of the working-age population. That means that an ageing population leads to rising expenditures that cannot be covered without increasing taxes on the young. Politicians have known about population ageing for around 50 years but [have] ignored the problems it will create.
Entitled “The Government Debt Iceberg,” the latest report from The Institute of Economic Affairs (IEA) in London was meant primarily for British eyes, but there’s enough in there to concern Americans worried about how the United States will make good on its promises. Researched and written by Jagadeesh Gokhale, a senior fellow at the Cato Institute, the problem facing both the U.K. and the United States is the same: making promises without making provisions to fulfill them.
If a private business made a promise to a customer to be fulfilled over time, it would book that promise as a liability and make present plans to fulfill it. Not so the government. Gokhale says that governments use “backward-looking” financials — measuring only what has already been spent in the past — with little if any regard for, and certainly no strategy to pay for, promises made to be fulfilled in the future.
At present the U.S. government owes debtors, both private and public, foreign and domestic, more than $17 trillion, an amount about equal to the entire output of the American economy in one year. Put another way, it owes more than four times the total revenues taken in by that government in one year.
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