To continue on with the previous post, I’d like to have you read a concise explanation of the problem by John C. Goodman.  Mr Goodman is the president, CEO, and Kellye Wright Fellow at the National Center for Policy Analysis.  This is the best discussion of the problem I have come across yet, and is much shorter than anything I could write.

“The need to deal with risk is not a new human problem,  From the beginning of time, people have faced the risks of growing old and outliving their assets, dying young without having provided for their dependents, becoming disabled and not being able to support themselves and their families, becoming ill, needing health care and not being able to afford it, or discovering that their skills are no longer needed in the job market.  These risks are not new.  What is new is how we deal with them.

Prior to the 20th century, we handled risks with the help of family and extended family.  In the 19th century, by the time a child was nine years old, he was usually paying his own way in the household.  In effect, children were their parents retirement plan.  But during the 20th century, families became smaller and more disbursed – thus less useful as insurance against risk.  So people turned to government for help.  In fact, the main reason why governments throughout the developed world have undergone such tremendous growth has to insure middle class families against risks that they could not easily insure against on their own.  This is why our government today is a major player in retirement, health care, disability, and unemployment.

Government, however, has performed abysmally.  It has spent money it doesn’t have and made promises it can’t keep, all on the backs of future taxpayers.  The trustees of Social Security estimate a current unfunded liability in excess of $100 trillion in 2009 dollars.  This means that the Federal Government has promised more than $100 trillion over and above any taxes or premiums it expects to receive.  In other words, for Social Security to be financially sound, the federal government should have $100 trillion – a sum of money six-and-a-half times the size of our entire economy – in the bank and earning interest right now.  But it doesn’t.  And while many believe that Social Security represents our greatest entitlement problem, Medicare is six times larger in  terms of unfunded obligations.  These numbers are admittedly based on future projections.  But consider the situation in this light: What if we asked the federal government to account for its obligations the same way the private sector is forced to account for is pensions?  In other words, if the federal government suddenly closed down Social Security and Medicare, how much would be owed in terms of benefits already earned?  The answer is $52 trillion, an amount several times the size of the U.S. economy.

What does this mean for the future?  We know that Social Security and medicare have been spending more than they are taking in for quite some time.  As the Baby Boomers start retiring, this deficit is going to grow dramatically.  In 2012, only three years from now, Social Security and Medicare will need one out of every ten general income tax dollars to make up for their combined deficits.  By 2020 – just eleven years down the road – the federal government will need one out of every four income tax dollars to pay for these programs.  By 2030, the midpoint of the Baby Boomer retirement years, it will require one outt of every two income tax dollars.  So it is clear that the federal government will be forced either to scale back everything else it’s doing in a drastic way or raise taxes dramatically.

I have not even mentioned Medicaid, but it is almost as large a problem in this regard as Medicare.  A recent forecast by the Congressional Budget Office – an economic forecasting agency that is controlled by the Democrats in Congress, not by some conservative private sector outfit – shows that Medicare and Medicaid alone are going to crowd out everything else the federal government is doing by mid-century.  And that means everything – national defense, energy, education, the whole works.  We’ll only have health care.  If, on the other hand, the government continues with everything it is doing today and raises taxes to pay for Medicare and Medicaid, the Congressional Budget Office estimates that middle-income families will have to pat two-thirds of its income in taxes!”

That’s some mess, isn’t it?   Next time, you’ll learn what could be done to help to straighten things out.  Do not fret too much.  For entrepreneurs, there just could be a silver lining to the black cloud we find ourselves in.  Think about it.

This content is reprinted by permission from Imprimus, a publication of Hillsdale College.   For a subscription go to hillsdale.edu