Projected Shortfalls from U.S. Defense Policy Dwarfs Social Security Shortfall

For Immediate Release: April 5, 2005

Contact: Lynn Erskine, 202-270-1557 or 202-332-5218

Washington, DC -- According to a new study by the Center for Economic and Policy Research (CEPR), the additional spending required to maintain U.S. military pre-eminence in the coming decades is likely to be many times larger than the projected Social Security shortfall.

While the United States is currently the pre-eminent military power, maintaining military dominance will be increasingly difficult as China passes the U.S. as the world largest economic power in approximately ten years, according to CEPR. The paper, "The Social Security Shortfall and the National Defense Shortfall," projects the amount of additional military spending that the U.S. will need to keep pace with China.

Using a purchasing power parity measure, which nearly all economists agree is the appropriate measure of economic output, China's economy is already two-thirds the size of the U.S. economy and larger than any other economy in the world. It is projected to exceed the U.S. economy by 2016 and grow to more than three times the size by the end of the century.

"Many analysts have failed to appreciate the true size of China's economy, because they use the wrong measure of the GDP," said Dean Baker, Economist and Co-Director at CEPR and author of the report. "It is possible to debate the importance of the projected shortfall in the Social Security program over its 75-year planning horizon. But in almost any scenario, maintaining the current U.S. defense policy over this period will impose far larger costs."

The paper shows that:

• Using a purchasing power parity (PPP) measure of GDP, China's economy is already two-thirds of the size of the U.S. economy and is projected to exceed it by 2016.

• In a low-cost scenario, the gap between the amount of spending needed to keep pace with China's military and the amount of spending projected by the Congressional Budget Office (CBO) will be more than 2.0 percent of GDP ($240 billion at 2005 output levels) by 2030, and nearly 5.0 percent of GDP by 2050 ($600 billion at 2005 output levels).

• In a mid-cost scenario, which assumes that China devotes the same share of its output to the military as the U.S. does at present, this military spending gap will be close to 7.0 percent of GDP by 2050 ($720 billion at 2005 output levels).

• In a high-cost scenario, in which China matches the share of output that the U.S. spent on its military at the height of the Cold War, the military spending gap will exceed 12 percent of GDP by 2030 ($1.4 trillion at 2005 output levels) and 18 percent of GDP by 2050 ($2.2 trillion at 2005 output levels).

• This U.S. military spending shortfall is far larger than the projected Social Security shortfall. In the low-cost scenario, the present value of the military spending shortfall over the next 75 years is $26.7 trillion, more than six times the size of the Social Security trustees projection of the 75-year shortfall in Social Security. The projected 75-year military spending shortfall in the mid-cost scenario is $35.7 trillion, nearly nine times the size of the projected Social Security shortfall. In the high-cost scenario, the projected military shortfall over the next 75 years is $89.2 trillion, more than 22 times the size of the projected Social Security shortfall.