The fiscal cliff  pales in comparisons to the impending entitlements program cliff, say Merrill Matthews, a resident scholar with the Institute for Policy Innovation, and Mark E. Litow, a retired actuary and chairman of the Social Insurance Public Finance Section of the Society of Actuaries.

According to the U.S. Census Bureau, 108 million Americans live in households where at least one person participates in a means-tested program. The number has grown rapidly under the Obama administration.

• Medicaid has grown from 46.9 million to 56 million people.
• Disability beneficiaries increased from 7.5 million to 8.8 million.
• Food stamp recipients have grown from 32 million to 47 million Americans.

The budgetary challenges for these programs are enormous.

• For the 2012 fiscal year, the nation spent around $2.2 trillion of its $3.7 trillion budget on entitlement programs.
• The cost of entitlement programs plus the interest on debt is nearly equal to total federal revenue today.
• Everything the government does is on borrowed, or printed, money.

Who is going to pay for all these benefits?

• The $2.2 trillion expenditures for 120 million-plus entitled individuals translates to $18,000 per beneficiary.
• Moreover, an estimated 10,000 people are retiring every day. As the 77 million baby boomers transition from being taxpayers to net benefit recipients, the funding stream further diminishes.
• Sustaining this level of entitlement expenditure will only result in a reduction in work effort, reduced employment opportunities, and more people moving onto entitlements.

To solve this crisis, three things must happen.

• Entitlement spending must decrease: Benefits program must be reengineered into a real safety net, helping those who need it most without having to create economic incentives to remain on welfare.
• Policies that encourage economic growth must be implemented.
• Several programs must transition to prefunded personal accounts.

Source: Merrill Matthews and Mark E. Litow, "The Coming Entitlements Cliff," Institute for Policy Innovation, October 30, 2012.

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