How the U.S. can avoid a fiscal wreck

Mon Mar 10, 12:15 AM ET

By David M. Walker

A growing number of people believe that we could be heading for a recession, if we are not already in one. In response, Congress has passed an economic stimulus plan, the Federal Reserve has cut the discount rate and the Bush administration has moved to try to steady the housing market.

Yet America faces much greater, and largely unaddressed, economic challenges that threaten to erode our economic strength and future standard of living. Key among them are our incredibly expensive and badly broken health care system and the upcoming retirement of the baby boomers. Both will require enormous government outlays in the years ahead.

Difficult and even unpopular choices are needed to turn things around.

(Illustration by Julie Stacey, USA TODAY)

What inaction will bring

In my view, we have a five- to 10-year window of opportunity to act. If policymakers don't, it is only a matter of time before interest rates begin to skyrocket and the U.S. debt is reduced to "junk bond" status. Higher interest rates will have an adverse effect on the federal budget, on the economy, on the finances of American households and potentially on the relative standard of living for most Americans.

It is time for an open and honest national dialogue with Americans on what they can realistically expect from the federal government and how they are going to pay for it. The plain and simple truth is that we are in a deep fiscal hole, and we are still digging.

The U.S. government's total liabilities and unfunded commitments for future Social Security and Medicare benefits and other items are estimated at $53 trillion, up from about $20 trillion at the start of this decade, and are rising at a rate of $2 trillion to $3 trillion a year.

This fiscal gap translates into an IOU of about $455,000 for every American household. In other words, our government has made a whole lot of promises that it will be hard-pressed to keep without increasing taxes to levels far beyond what the American people have tolerated historically. By refusing to make tough choices and by charging up the nation's credit card, we are mortgaging the future of our children and grandchildren.

If we continue as we have, policymakers will eventually have two options: raise taxes dramatically or slash government programs and services. To avoid this fiscal train wreck, we need to make three changes as soon as possible:

* First, we need to impose strong budget controls, written into law, to constrain federal spending as well as the many tax preferences that reduce revenue and represent a type of back door spending.

* Second, lawmakers should work with the Government Accountability Office and the Congressional Budget Office to enhance transparency in federal financial reporting and budget practices. For example, current five- to 10-year budget projections fail to consider the massive costs associated with the retirement of baby boomers. They also ignore the revenue losses that will result if recent tax cuts become permanent.

* Third, it is time to establish a capable, credible and bipartisan commission to make recommendations to the next Congress and president for reforming Social Security as well as our health care and tax systems.

Hopefully, Congress will enact something this year.

Ultimately, the American people need to become better informed and more involved in demanding change from elected officials. Younger Americans, especially, need to speak up because they and their descendants will pay the price and bear the burden if today's leaders fail to act.

I believe the need to act is so critical that I have chosen to resign my position as Comptroller General of the United States to become the CEO of the newly created Peter G. Peterson Foundation. The Peterson Foundation will seek to raise public awareness and aggressively advocate sound policy solutions to a number of key sustainability issues, including entitlement programs and our nation's health care system.

The next president

Public officials must start thinking strategically and put our country's longer-range needs above their short-term political interests. Otherwise, they are setting the stage for a future economic crisis far graver than our current challenge. The American people should listen carefully to what candidates say, or fail to say, about our country's mounting fiscal challenges.

The next president, whoever he or she may be, must make fiscal discipline a top priority and use the bully pulpit to push reforms. If this happens, we can meet our sustainability challenges head on, keep America strong and avoid the kind of economic and political decline that beset another great republic — Rome.

David M. Walker's resignation as Comptroller General of the United States takes effect Wednesday.