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U.S. debt woes are not so dire, experts say

With nearly $2.4 trillion already trimmed from projected U.S. deficits over the next decade, the nation is on its way to sustainable levels of debt in the near term.

January 31, 2013|By Don Lee and Jim Puzzanghera, Los Angeles Times

And despite high unemployment, stagnant wages, widening social and economic gaps and other significant challenges, the country's economy is growing, its core inflation remains in check, its credit standing is still strong and it has control over its currency, unlike Eurozone nations.

For all the political dysfunction and brinkmanship in Washington, with each averted crisis, investors seem to be taking things in stride.

"The ongoing assumption is that somehow, some way, some compromise will be reached, and we continue to see evidence of that," said Paul Zemsky, head of multi-asset investments at ING Investment Management.

As the economy shows signs of improvement, he said, Washington's deficit situation is not so daunting. "When you look at the next 10 years, it's not that bad."

The problem gets more daunting after that. Even if the debt is stabilized as Kogan described, it would begin to rise after 2023, first very slowly and then with increasing speed in later years unless significant changes can be made in the rate of healthcare inflation.

Assuming no other major changes in the economy or government programs, Zandi says, his models show a similar trend, with a fiscal meltdown hitting in 2028.

Two factors would drive that increase. The smaller one is that the aging of the huge baby boomer generation has started to pinch Social Security's finances, as has been forecast for years. The system paid more than it took in in 2010 and 2011, the first time that has happened since 1983.

"Social Security has always added to government net resources; now it's running deficits of $100 billion or more a year," said J.D. Foster, a senior fellow at the Heritage Foundation.

Although by law Social Security does not directly add to the nation's debt, the system's changing financial picture creates potential problems. When Social Security taps some of its vast surplus from previous years to keep from cutting benefits, the government has to borrow to produce that money because it already has used it.

Still, spending on Social Security will rise only to 6% of GDP in 2030, from 5% today, according to the Congressional Budget Office. And the trust fund isn't projected to run out of money until 2033.

Federal expenditures for healthcare are projected to rise much faster and are the single biggest problem for the long-term sustainability of the budget.

Spending for Medicare, the largest of the government's health programs, grew an average of 6.7% a year from 2007 through 2011. It rose by only half that in the last fiscal year, but experts say it's hard to know whether that slowdown is permanent.

"By later in the decade, we should have substantially more knowledge of what works and what doesn't" to slow healthcare cost without impairing quality, Kogan said in a recent policy paper.

Stabilizing the debt over the coming decade, he said, would "buy time to find answers to these important questions."

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