Day of reckoning

Northwestern Financial Review, Dec 15-Dec 31, 2004 by Bengtson, Tom

President Bush has identified Social security reform as a top priority. He wants to give workers the opportunity to put part of their Social security money into personal investment accounts. The idea is a real two-edged sword for bankers.

First, the new accounts could mean billions of dollars in new deposits if banks are allowed to set up the accounts. But second, dollars going into the accounts won't be available for current Social security benefit recipients. Uncle Sam will have to borrow more money to make up for the lost income.

The questions surrounding this country's growing deficit came up at the ABA's Agricultural Bankers Conference, which is covered in this magazine beginning on page 10. The federal budget deficit for 2004 was $418 billion. The total U.S. debt is $4.5 trillion, or $7.5 trillion if you count $3 trillion the government owes itself. It is difficult to assess how much debt the personal investment accounts would add to that total, but I have seen long-term estimates in the trillions of dollars.

Part of the problem is so much of the U.S. debt - 48 percent - is held by foreign interests. The falling value of the dollar makes dollar-denominated securities less attractive. If foreign investors lose their appetite for U.S. Treasuries, interest rates will rise. This will attract that foreign capital back, but it will make everything more expensive for those of us who live here.

Some economists argue it is too soon to worry because the debt totals are manageable relative to the country's Gross Domestic Product. Sure, we have a large budget deficit but it's only 3.6 percent of GDP, compared to a mid-1980s deficit that equaled about 6 percent of GDP. Just as a more prosperous individual can afford a bigger mortgage, a more prosperous nation can handle higher levels of debt.

Nonetheless, the issues surrounding Social security are serious. Social security trustees say that by 2018 the system will be paying out more than it is collecting, and by 2042 the entire fund will be exhausted. Ag economists at the ABA conference noted the debate surrounding government payments to farmers is also about cost - $15.7 billion paid out last year, or $131 billion since 1995. Although a lot of ideas will be kicked around when the farm bill is renewed in 2007, no one expects a dramatic drop in the cost of farm programs.

Whether funding Social security, farm programs or other worthwhile efforts, mounting debt is a concern. There is no free lunch and at some point we all have to settle our accounts. The question is whether that will be in the next few years or whether that day of reckoning is decades away.

By Tom Bengtson, Publisher