Where DOES All That Money Go?

Want a readable guide to the US Federal Budget?

Try“Where Does the Money Go?: Your Guided Tour to the Federal Budget Crisis ” by Scott Bittle and Jean Johnson (Collins, $16.95 in paperback). This is a book that manages to be entertaining and irreverent while serving as an informative primer on a subject that is crucial to the future of all Americans.

Highlights from the New York Times...

In 31 of the last 35 years, the federal government has spent more money than it has taken in. (The exceptions were the budget surplus years 1998 to 2001.) Along the way, the government has amassed a debt that now exceeds $9 trillion. Over $2 trillion of that is owed to foreign banks and other international investors, with China holding $420 billion and the oil-exporting countries $113 billion, using figures from the 2006 budget.

Mr. Bittle and Ms. Johnson predict that even with continued foreign investment and financial forbearance, the nation may soon find it impossible to fulfill its existing and future commitments to its own citizens in the form of Social Security and Medicare payments. In 2006, Social Security, Medicare and Medicaid consumed 39.7 percent of the federal budget of $2.6 trillion, compared with 19.7 percent for defense.

In the future, the cost of entitlement programs will balloon as 78 million baby boomers age. In 2006, there were fewer than 50 million Social Security recipients; 12 years from now, there will be nearly 70 million. With health care costs rising faster than inflation, the part of Medicare that covers hospital costs for the elderly is already paying out more than it takes in from payroll taxes.

“Unless something changes, we could see a time (around 2040, if nothing is done) when nearly every tax dollar collected will be needed to pay for retirement and health care for the elderly and interest on the debt,” the authors warn. “There will be almost no money for anything else, except maybe a basic national defense.”

Their proposed solutions include raising to 70 the age at which people receive retirement benefits; making people pay more in Social Security taxes, as well as privatizing Social Security (“but very slowly”); rethinking the prescription drug program, is expected to add $518 billion in costs by 2013; redesigning Medicare so that people can shop around for the most effective coverage; and passing a national value-added tax to help pay for Social Security and Medicare.

For the time being, the globally respected “faith and credit” of our federal government are keeping the United States afloat financially. But if we are unwilling to swallow the kind of bitter medicine that Mr. Bittle and Ms. Johnson prescribe, our country may one day be unable to make even the interest payments on our $9 trillion debt, payments that are now $226.6 billion a year — and we would be forced to declare ourselves a bankrupt nation.