New Report by the Heritage Foundation underscoring how “The calamitous fiscal trends of our time—dependence on government by an increasing portion of the American population, and soaring debt that threatens the financial integrity of the economy—worsened yet again in 2010 and 2011”.
Today, more people than ever before—67.3 million Americans, from college students to retirees to welfare beneficiaries—depend on the federal government for housing, food, income, student aid, or other assistance once considered to be the responsibility of individuals, families, neighborhoods, churches, and other civil society institutions. As if those circumstances were not dire enough, the country is about to witness the largest generational retirement in world history by a population that will depend on currently bankrupted pension and health programs.
“One in five Americans — or slightly more than 67 million — now relies on federal assistance, at a cost of $2.5 billion annually. That’s the highest in the country’s history, the authors wrote. The index also found that Americans who depend on federal assistance receive an average of $32,748 in benefits, about $300 more than the nation’s average disposable personal income. Overall, about 70 percent of the federal government’s budget is directed to individual assistance programs. And nearly half of the population, or 49.5 percent, don’t pay any federal income taxes, according to the survey.”
This year, 2012, marks another year that the Index contains significant retirements by baby boomers. Over the next 25 years, more than 77 million boomers will begin collecting Social Security checks, drawing Medicare benefits, and relying on long-term care under Medicaid.
Much of that growth in new debt can be traced to programs that encourage dependence. Chart 2 illustrates how 70.5 percent of federal spending now goes to dependence-creating programs, up dramatically from 28.3 percent in 1962, and 48.5 percent in 1990.
The Fiscal Calamities Created by Growing Dependence
Entitlements. The issue of dependence is particularly salient today when more and more Americans are increasing their reliance on government as they pass into retirement. Current retirees became eligible for Social Security income, as well as for health care benefits from Medicare or Medicaid, at age 65. These programs currently make up 42 percent of all non-interest federal program spending. Over the next two decades, that spending will increase to nearly 62 percent of non-interest spending as 10,000 baby boomers per day retire and begin to collect benefits. Jointly, these programs will enable the government dependence of nearly 80 million baby boomers.
This phenomenon is particularly troubling because most of the soon-to-be users of these programs are middle-class to upper-class Americans who do not need government support. Since eligibility for these programs is linked to age, not financial need, millionaires collect the same benefits, such as subsidized prescription drugs through Medicare Part D, as do low-income retirees.
Paying for these middle-class and upper-class entitlements in the coming years will require unprecedented levels of deficit spending. Focusing on Social Security and Medicare alone, Americans face $45.9 trillion in unfunded obligations (read: new borrowing) over the next 75 years. That is more than $200,000 per American citizen—an unsustainable level of debt that is sure to slow the economy and could force even higher rates of taxation in the future.
Growth in the Non-Taxpaying Population.
The challenges that Congress faces in reforming these entitlement programs are heightened by the rapid growth of other dependence-creating programs, such as subsidies for food and housing and college financial aid, and by the growing number of Americans who incur no obligations for receiving them. How likely is Congress to reform entitlements in any meaningful way under such circumstances? Can Congress rein in the massive middle-class entitlements in an environment of fast-expanding dependence programs?
In 1962, the first year measured in the Index of Dependence on Government, the percentage of people who did not pay federal income taxes themselves and who were not claimed as dependents by someone who did pay federal income taxes stood at 23.7 percent; it fell to 12 percent by 1969 before beginning a ragged and ultimately steady increase. By 2000, the percentage was 34.1 percent; by 2009, it was 49.5 percent. In short, the country is now at a point where roughly one-half of “taxpayers” do not pay federal income taxes, and where most of that same population receives generous federal benefits. (See Chart 1.)
3) Retirement. Since the time of President Franklin D. Roosevelt, the American retirement system has been described as a three-legged stool consisting of Social Security, employment-based pensions, and personal savings. The reality is quite different. Almost half of American workers (about 78 million) are employed by companies that do not offer any type of pension or retirement savings plan. This proportion of employer-based retirement savings coverage has remained roughly stable for many years, and experience has shown that few workers can save enough for retirement without such a payroll-deduction savings plan. For workers without a pension plan, the reality of their retirement is closer to a pogo stick consisting almost entirely of Social Security.
However, the demographic forces that once made Social Security affordable have reversed, and the program is on an inexorable course toward fiscal crisis. To break even, Social Security needs at least 2.9 workers to pay taxes for each retiree who receives benefits. The current ratio is 3.3 workers per retiree and dropping because the baby boomers produced fewer children than their parents did and are now nearing retirement. The ratio will reach 2.9 workers per retiree around 2015 and drop to two workers per retiree in the 2030s.
Current retiree benefits are paid from the payroll taxes collected from today’s workers. Due to the effects of the recent recession, Social Security has not collected enough taxes to pay for all its promised benefits since 2010. Both the Social Security Administration and the CBO say that these deficits are permanent.
Read more in-depth studies on entitlements here
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