This article originally appeared in the online edition of Pensions & Investments on 10 October 2012.
With the presidential debates underway, election season should now move from the phase of ideological chest-pounding to a more substantive discussion of the path toward economic recovery.
For obvious reasons, our country deserves and needs a much deeper debate to take place over the next few weeks as President Barack Obama and Mitt Romney campaign for the presidency. The heart of the matter is bad math. At issue are the entitlement promises made to our society, which for the most part were established with a blind eye to population growth and international competition in industry.
Too often, deferred entitlements were the bargaining chip set on the table in exchange for other concessions during labor disputes. This took place in private enterprise, but more importantly the same dynamic has played out between Washington and the electorate time and again over the last century. Both history and the current environment provide examples in industry and at the municipal level where the bad math caught up with reality. In years past, the steel and airline industries, among others, have both had to turn to the Pension Benefit Guaranty Corp. for assistance. More recently, municipalities like Vallejo and San Bernardino in California, and Harrisburg, Pa., are buckling under the bad math.
Beneath the surface, the threat of similar outcomes results in less productive behavior by cash-strapped entities all too frequently. Companies commit fewer resources to research and development and other expansionary activities. Cuts to education and public services are implemented in order to satisfy claims. The consequence is lower realized growth today and a drop in future potential growth as investment in youth and infrastructure is diverted.
Before anyone is comfortable admitting it in public, the bad math is going to be a crisis at the national level. How our leaders choose to address it must become the issue of substance so that we may lower the cost. The length of time spent on diverting our collective attention to the facts - and the tendency for politicians to shift the debate to one of ideology – only serves to increase the ultimate tally.
Some decisions along the way should be easy, like increasing the retirement age of 65. It was established in 1935 after government analysis showed that age "produced a manageable system that could easily be made self-sustaining with only modest levels of payroll taxation," according to the Social Security Administration. This math may have been good at the time, but is has been contaminated by the realities of increasing life expectancy and the baby boom.
Other considerations will be less simple.
First, our leadership needs to decide how much growth and productivity we are willing to sacrifice to satisfy our entitlements. Put another way, how much of our entitlement structure are we willing to sacrifice in order to satisfy our growth and productivity goals? Second, what is the correct mix of tax reform, spending cuts and re-striking of entitlement benchmarks to optimize the societal and economic outcomes afterward? This debate alone has literally paralyzed the federal government over the last two years. Third, a timeline for transition must be mapped out that balances the urgency for change with the need for time to allow institutions and individuals to change their behavior before they reach retirement.
The longer it takes for our leaders to address the reality the worse the math becomes, and the greater the ultimate cost will be.