When Federal Reserve Board Chairman Ben Bernanke warned of looming future budget deficits in his widely quoted statement of January 18, he said nothing incorrect. Nevertheless, his statement is fundamentally misleading, a fact attested to by the failure of every commentary I have read to understand the true significance of the fiscal threat.

Mr. Bernanke, following common practice, lumped together three entitlement programs—Social Security, Medicare, and Medicaid—and, again following common practice, projects frightening growth in total federal spending on them. His summary: “because of demographic changes and rising medical costs, federal expenditures for entitlement programs are projected to rise sharply over the next few decades.”

What Mr. Bernanke failed to make clear is that the aging of the U.S. population is not the fundamental root of the problem. It is the second cause, rising medical costs, that threatens to break the budget. What is more important, the growth in federal deficits is only a sideshow in our ongoing medical cost crisis. The whole economy—employers, families, local governments, and the federal government too—all are staggering under the burden of rising health care costs. To identify this as a crisis of fiscal deficits is like calling global warming a problem of erosion of public beaches.

What is more important, by lumping together Social Security, Medicare, and Medicaid, Mr. Bernanke perpetuates the confusion surrounding the two sources of rising public spending. Social Security, which does indeed face a modest challenge of rising benefits due to the aging population, is expected to increase its demands on the national economy by only two percentage points of GDP over the next seventy-five years. The figure that Mr. Bernanke flags—an increase in public spending from 8.5 percent to 15 percent of GDP from 2006 to 2030—is almost all due to rising medical spending. And rising Medicare and Medicaid spending is driven only in small part by the aging of the population.

It is the economy-wide medical cost crisis that is projected to drive the deficit through the roof. The aging of the population shifts a larger part of medical spending to the federal budget, but the effect of that alone would be relatively small, comparable to the increase in spending for Social Security—two or three percentage points of GDP over the next century—not the precipitous rise in medical spending that Mr. Bernanke cites.

Here are the lessons that Mr. Bernanke’s warning about future fiscal deficits obscures:

• First, we will need to channel about 2 percent more of our GDP through the Social Security system over the next seventy-five to one hundred years to provide minimum guaranteed pensions to the elderly.
• Second, the costs of Medicare and Medicaid are growing out of control. This is due to the continuing rapid growth of health care costs, which outstrip the growth of the rest of the economy year after year.

Unlike the gradually rising cost of Social Security, which simply reflects the growing share of old people in the population, the cost of medical care is not a problem that slightly higher taxes can solve. Just as General Motors cannot continually raise car prices to pay its rising health insurance costs, the federal government cannot raise taxes higher and higher to pay the federal medical bill. General Motors is competing with countries that have achieved higher life expectancies than we have at much lower medical cost. It is about time that we replaced our dysfunctional health care system with something cheaper and better. That is the real challenge Mr. Bernanke’s remarks should have highlighted.

Bernard Wasow is a Senior Fellow at The Century Foundation.