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For immediate release: April 27, 2007

Unresolved Budget Issues Could Harm Economy, Warns Dallas Fed’s Economic Letter

  • Entitlement shortfall could threaten U.S. economic growth
  • Unfunded liability for Medicare drug benefit exceeds Social Security shortfall
  • Higher retirement age, lower cost of living adjustments among solutions
DALLAS—Escalating fiscal issues impacting the U.S. budget deficit could potentially threaten the nation’s economic health, according to the April issue of the Federal Reserve Bank of Dallas’ Economic Letter.

In “Fiscal Fitness: The U.S. Budget Deficit’s Uncertain Prospects,” senior economist Jason Saving explains that while U.S. budget deficits have been shrinking over the past few years, surging entitlements—especially the Medicare drug benefit—pose a serious long-term risk to the budget and could harm the economy’s growth rate.

“The unfunded liability for Medicare Part D alone—the drug benefit that took effect in January 2006—is greater than the entire Social Security shortfall,” Saving writes.“Dividing the $88.2 trillion [total unfunded liability] evenly among the 300 million people who live in the United States produces a per-person liability of about $290,000—more than five times the average household’s annual income.”

Saving says proposals for a higher retirement age, lower cost-of-living adjustments and a more progressive payroll tax could provide some relief for meeting entitlement obligations; however, he also points out that policymakers “must be mindful that some of these avenues will be more harmful to the economy than others.”


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James Hoard
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