The Trouble With Unfunded Entitlements

by: Paul Kedrosky

Michael Cembalest of JP Morgan’s (NYSE:JPM) latest contains this chart comparing funded and unfunded entitlements – stuff countries have promised citizens, but haven’t figured out how to pay for – in the U.S. and Europe. (Click to enlarge)

iou-usAnd how might we pay for such absurd obligations? Here’s Cembalest:

  • By 2020, the average EU country would need to raise its tax rate to 55% of national income to pay promised benefits.
  • The U.S. could fund its shortfall by doubling the 15.3& payroll tax on employers and employees (forever).
  • Alternatively, the U.S. could reduce discretionary spending by 80%, on things like education, defense and environmental protection. Why so high? There’s not enough discretionary spending left (the OMB estimates that mandatory spending will make up 71% of government expenditures by 2016).
  • Of course, the other option would be the printing press (inflation), which would be worse given how much would be needed.

Appalling stuff. Wait, it gets worse, as Cembalest says:

Some politicians and think tanks (e.g. the Tax Policy Center) have argued that tax revenues and government spending as a % of US GDP are not that high, so there’s room for both to rise. The analysis above renders such claims disingenuous at best. Measures of current spending do not capture the scope and size of government programs that already exist, and which will have to be paid for, although no one knows how. Richard Fisher (Dallas Fed President) likens the US entitlement burden to German attacks on the UK in the 20th century, the costs of which eventually sunk the British pound; except this time, the wounds are self-inflicted.