By Bill Garrett,
a practicing Certified Financial Planner(tm) in Brentwood, TN, U.S.A.

http://www.garrettfinancial.com/

The purpose of this paper is to raise awareness of the threat our nation's deficit spending poses to all Americans in the future.

As a financial planner I deal with cash flow issues daily. Perhaps that's why I have become increasingly disturbed by Washington's irresponsibility when it comes to its budget. Admittedly, I am not an expert on the national budget so this paper will rely heavily on what the experts say. However I believe I know a little about smart money management and what my research has revealed is sobering.

Forces in America are coming together to create an economic disaster for the U.S. unless solutions to our overspending as a nation are dealt with soon! The forces I refer to are the retirement of 78 million Baby Boomers, rising healthcare costs, and the growing national debt. For decades our country has engaged in deficit spending. Another way to describe it is spending money we don't have. The national debt has risen to $9.2 Trillion. That averages out to over $400,000 owed per household in the U.S.

From 1996 to 2006, the percentage of the public debt owed to foreign and international investors rose from 28% to 44%. This trend is disturbing as it indicates a growing breech in our security because we now are heavily dependent on foreign money to operate our government and all its programs. Left unchecked we might even see the day when foreign nations would not want to loan us money. Make no mistake; the rest of the world is watching us. David Walker, Comptroller General of the United States, said in an interview on the Glen Beck show that he thinks we have five to ten years to demonstrate to the world that we are serious about fixing our financial problems or we may find them unwilling to loan us money.

The Government has been borrowing from Social Security's surpluses for years to avoid dealing with its overspending. However, those surpluses will begin to decline in 2009 and will end in 2017. After that the government will have to begin repaying Social Security to pay out retirement benefits to Americans. Repayment will have to come through additional borrowing, raising taxes, spending cuts or a combination. Some of the cuts may be in Social Security benefits.

In January, 2007, the Comptroller General warned the Senate Committee on the Budget that, "Continuing on our current fiscal path will gradually erode, if not suddenly damage, our economy, our standard of living, and ultimately even our domestic tranquility and our national security."

If substantial changes are not made very soon we could see government cutbacks of 60% or taxes raised by 100% by 2040 just to balance the budget. Walker warns, "If nothing changes, the federal government's not going to be able to do much more than pay interest on the mounting debt and some entitlement benefits. It won't have money left for anything else – national defense, homeland security, education, you name it."

Federal Reserve Chairman Ben Bernanke validated much of Walker's take on the situation at the 2007 Congressional hearings, and so did ranking Republicans and Democrats on the Senate Budget Committee.

Senator Kent Conrad of North Dakota, Chairman of the Budget Committee, was asked by 60 Minutes reporter Steve Kroft, if he agrees with Walker's figures and his projections. Sen. Conrad said, "I do. ... he is telling [it] exactly correct."

Conrad acknowledges that most people in Washington are aware how bad the situation is. "They know in large measure here, Republicans and Democrats, that we are on a course that doesn't add up," the Senator told CBS reporter Steve Kroft. When asked why somebody doesn't do something about it? Conrad replied, "Because it's ... always easier to defer, to kick the can down the road to avoid making choices. You know, you get in trouble in politics when you make choices."

When Congress and the Administration recently added prescription drugs to Medicare they only looked at the estimated $400 billion cost over ten years. The GAO estimates the real long term cost at over $9 Trillion! We cannot afford this Alice in Wonderland attitude nor should we tolerate it.

Although Social Security spending is projected to increase, it is not rising as rapidly as healthcare costs. The Congressional Budget Office (CBO) estimates that Medicare and Medicaid spending will be more than three times that of Social Security by 2016." By 2032 it is expected that our Gross Domestic Product will rise 71%. Social Security will rise 127%, Medicaid will rise 224%, and Medicare will rise 235%!

The Comptroller General has also said, "... the U.S. government's total reported liabilities, net social insurance commitments, and other fiscal exposures continue to grow and now total approximately $50 trillion, representing approximately four times the nation's total output, or gross domestic product (GDP) in fiscal year 2006, up from about $20 trillion, or two times GDP in fiscal year 2000...Simply put, our nation is on an imprudent and unsustainable fiscal path."

This year the Baby Boomers begin leaving the labor force. Reflecting this demographic shift, the CBO projects the average annual growth rate of real GDP will decline from 3.1 percent in 2008 to 2.6 percent in the period 2012-2016. This slowing of economic growth will come just as spending on Social Security, Medicare and Medicaid will begin to accelerate-accounting for 56 percent of all federal spending by 2016 compared to 43 percent in 2006."

It is too easy for us to rely on simplistic solutions. There are no easy answers. The reality is that: