This morning's Wall Street Journal has a brilliant article written by Glenn Hubbard, currently the Dean of the Business School of Columbia University. The subtitle of the article, in the opinion section of the WSJ, is "Tax Increases Can't Plausibly Address the Coming Entitlement Crisis."
This article is a well reasoned and fully accurate picture of the problems that the entitlements have created.
The entitlement problem is compounded by the fact that the very existence of these entitlements (social security and medicare) have reduced the incentive to save to zero for most middle class Americans. Why save when the government guarantees money and health care in retirement for you? In the mid 1970s when social security and medicare were dramatically expanded, the savings rate in the US fell off the cliff and has never recovered. Not even the current recession will keep savings from collapsing back to zero.
Until the entitlements are effectively phased out, which is really what Hubbard is advocating with a velvet glove, there will be no aggregate savings in the United States. This means larger and larger trade deficits and certain bankruptcy for the federal government and most states. If the squirrels don't put away acorns in the summer and fall, then none are available come winter.
We have changed the behavior of the average American with the entitlements. They don't save anymore. As Hubbard notes, the entitlements will surely bankrupt the country unless they are phased out and until they are phased out the US will continue along the zero savings path.
