If you think too many baby boomers are blissfully ignorant of their own financial future, just turn your attention to Washington, D.C.

Peter G. Peterson, author of Gray Dawn: How the Coming Age Wave Will Transform America — and the World and Running on Empty: How the Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It, has some choice opinions about how the political class is mortgaging America's future through what he calls reckless tax cuts, out-of-control spending and Enron-style accounting in Congress. That's some pretty blunt talk from a Republican, who served as a secretary of commerce (under Nixon) and as a chairman of the Federal Reserve Bank in New York. In 1994, he was a member of Clinton's Bipartisan Commission on Entitlement and Tax Reform. Peterson is currently the chairman of the Blackstone Group and chairman of the Council on Foreign Relations.

Registered Rep.: In your book, Running On Empty, you predict an imminent fiscal crisis that you say threatens to bankrupt the industrialized world, a result of global aging and reckless government spending. You detail a lack of retirement planning, a lack of personal savings coupled with a long list of federal entitlements that we'll likely have trouble paying within a decade or so. You squarely place the blame on politicians in Washington who, you write, “have presided over the biggest, most reckless deterioration of America's finances in history.” In your book, you describe a fiscal elephant in the room. What does that mean?

Peterson: We have two fiscal elephants in the room. And they are closely related. On the domestic side, we are preoccupied with a discussion of today's budget deficit. We should be far, far more concerned about the long-term deficit outlook, given that 77 million boomers — twice the number of elderly we have now — will begin to retire in five years. Also, [federal] programs are entirely unfunded, since they are pay-as-you-go programs.

Since your audience is financial advisors, they will certainly appreciate the difference between a funded obligation, which is true of most of the corporate pensions, and a totally unfunded one like the U.S. government. What they may not be aware of is how huge these unfunded liabilities are.

Rep.: How bad is it?

Peterson: If you take the Social Security trustees' estimate for Social Security and Medicare — the unfunded liabilities' present value in today's dollars — for the next 75 years, it's $45 trillion. Remember, the entire net worth of America is $42 trillion. If you extend them indefinitely, as most experts think you should do, it's $74 trillion. Now that's an unthinkable burden that we're placing on the future, one that the politicians don't talk about.

Rep.: So the first elephant is…

Peterson: So one fiscal elephant is this huge mountain of unfunded liabilities that are going to impose unthinkable taxes. They estimate at least a doubling of payroll taxes on our kids and grandkids.

The second deficit, the twin deficit that's getting far too little attention, in my opinion, is the current account deficit, or what you might call our foreign deficit, that comes about from the fact that we're spending much, much more than we're producing, and we have to borrow the rest.

The trade deficit, which is approaching $600 billion a year, is one very important element of the current account deficit. Now, this leaves us in a very awkward position where we depend on foreign savings to lend us, in effect, over $2 billion every workday. Now I don't know of anybody who's thought about this problem, who believes you can borrow 5.7 percent of the GDP, which is about 60 percent higher than it's ever been in the history of this country, over any long period of time. They think it's unsustainable, virtually unanimously.

As Herb Stein in the Nixon administration said, if something's unsustainable, it tends to stop. Or he said, if your horse dies, we suggest you dismount. We're going to have to get off of this horse; and the question is: Are we thrown off, or can we get off more or less gently in time?

Rep.: That sounds pretty dire.

Peterson: I've interviewed for Running on Empty some 12 leading experts who know a lot more about capital markets than I do. Half of them believe, like Paul Volker and Bob Rubin, that we're taking a very serious risk of what they call a hard landing. Volker says 75 percent chance of a crisis in five years. A hard landing is a sudden drop in the dollar because foreigners lose confidence, a big spike in interest rates with the effects on financial markets and the economy that come from a big increase in interest rates. So, it's the two elephants that I think we should be thinking about, not just the budget deficit.

Rep.: So what's the answer? You say spending has to be cut, but how? And what's a fair tax rate?

Peterson: There is no solution to this problem without reducing the benefits of the huge entitlement programs, because they are the programs that utterly dominate the forward budget. And this is, politically, very incorrect.

Rep.: What's the alternative to pay as you go?

Peterson: Well, it's called funding. We had several hundred billion dollars a year [budget surplus], and why don't you take that money and put it in some funded accounts, and get people started, because when I was in industry, a CEO at Bell & Howell, we had a funded profit-sharing account, and I saw what happens when people see their accounts grow and it's their money.

You would have an account, and the account would say Joe Jones now has X hundred or thousand dollars, and here it is building, and you'd invest it. I would put it — you probably ought to take a look at my book, because my proposal is global indexing funds, both fixed income and equities.

Rep.: The financial services industry would approve.

Peterson: Well, some of them would, certainly. Another proposal is on Social Security; we have to focus on the benefit issue, which I think is central to solving the problem, how you reduce the benefits in a humane way.

And Franklin Delano Roosevelt, you remember, set up Social Security, but remember what he said, it was a safety net for the truly needy. It's now become a well-padded hammock for the middle and upper classes.

But the problem that leaves is if everybody's on the wagon, who's going to pull it? As long as the tax-paying worker base was growing rapidly, as we did with the boomers, where the birth rate went way up, the tax revenues were coming in, and, of course, we didn't do what we said we were going to do, which was set the money aside, we spent it.

It's all about winning elections. It's all about getting people to like you. What do people like? They either like money spent on them, or they like tax cuts. So we've been living in this Disneyland, it's all pleasure, there's never a price paid, never a sacrifice.