An unprecedented demographic transformation is taking hold against the backdrop of steadily rising health care costs and steadily falling national savings. This is a dangerous combination for the future health of the economy. It may seem that there is no immediate crisis, yet according to a broad bipartisan consensus current fiscal policy is on an unsustainable path.

The baby boomers' imminent retirement is ushering in a permanent shift to an older population -- and a permanent rise in the cost of programs such as Social Security, Medicare, and Medicaid, which already comprise 42 percent of the federal budget. There is no plan to pay for it all other than running up the national debt.

The basic facts are a matter of arithmetic, not ideology. Two factors stand out: demographics and health care costs.

Over the next 30 years, the number of Americans aged 65 and up is expected to grow from 13 percent of the population to 20 percent. The working age population will grow by only 14 percent over this time, shrinking from 60 percent of the population to 55 percent. As a result, the ratio of workers paying into Social Security and Medicare relative to the number of beneficiaries will fall by roughly one-third.[1]

This portends an era of extraordinary demands on the economy and the nation's workforce, which will be called upon to transfer a large and rising share of resources from workers to retirees. At the same time, one of the major engines of economic growth -- an expanding workforce -- will slow substantially due to the large exodus of older workers from the labor force and lower birth rates following the baby boom.

Even without a fiscal crisis, future standards of living are at risk. As Federal Reserve Board Chairman Ben Bernanke has observed, "the aging of the population is likely to lead to lower average living standards than those that would have been experienced without this demographic change."[2]

Demographic change, however, is only part of the problem. Health care costs have consistently outpaced economic growth since 1960. If this phenomenon persists, it will greatly compound the growing fiscal problems attributable to the rising number of aged.

Assuming that the growth rate of health care costs does not slow, Medicare, and Medicaid will grow by nearly four times as a share of the economy (GDP) by 2050. They will absorb as much of our nation's economy by the late 2050's, as the entire federal budget does today. Most of that increase would come from the rising cost of health care rather than demographics alone.

All of this has ominous implications for the size of government relative to the size of the economy -- a more meaningful measure of federal activities than looking at dollar figures alone. By the time today's 20-year olds reach retirement age, the overall cost of government as a share of the economy is on track to reach levels not seen since World War II -- the big difference being that instead of spending the money on a life and death struggle against totalitarian aggression we would be spending it on an ever-rising stream of benefit payments.

Today, federal government spending absorbs 20 percent of the economy.[3] At the high end of what the nonpartisan Congressional Budget Office (CBO) sees as a possible range, federal spending could rise to 42 percent of GDP in 2050. In contrast, federal spending never went above 44 percent of GDP throughout World War II.

While it may be unrealistic to assume that nearly half the nation's economic output could be consumed by government programs, even if the cost of government rose to 30 percent of GDP, the share of the economy consumed by government spending would be 50 percent greater than it is today.