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Daschle and the Democrats cannot let Kalifornia fail. After what Kalifornia did to bond holders of the utility companies, the state could have some difficulty in peddling these instruments. After the history of default from Orange County, governments including state governments are going to start paying higher risk premiums if they can sell them at all. This could be a very juicey scenario for Simon and conservatives. If we had a better conservative in the White House, a federal bail out would be less likely to happen. After the fed bailed out Chrysler and NYC years ago (recent federal NYC funding is politically and morally a bit different), Bush will have a hard time saying no, a political price he will not be willing to pay or face. But here is a table stakes game where the left could potentially be forced out of the game, or the right could lose most of its current perceived advantages.

What you see happening in Kalifornia now, is what you are going to see in 2008 when Medicare enters permanent negative cash flow, and in spades when Social Security enters permanent negative cash flow in 2012. Who will buy the bonds of a government who will never ever be able to repay and will progressively be needing to borrow more each and every year forever? There is not enough resources in the United States to pay the unfunded liabilities of Medicare and Social Security. The US will default on some of the unfunded liabilities (cut promised benefits to beneficiaries who will be the baby boom generation that doesn't take no for an answer), raise taxes to pay for some of the shortfall (cutting the income of their own children and grand children depriving them of a secure retirement-what would you tell your own spendthrift profligate parent or grandparent-would you cough up or tell them to get a job), this will be when the chimes for midnight of the US will begin to chime. There will be no presidential election in 2016 because the clock will have run out before the elections can be held. Can anything be done to head this off? Maybe.

What can be done?

I understand the scenario you are painting. You are making a BIG ASSUMPTION, and you know what they say about ASSUME.

Specifically, the key to your assumption is that there is a demographic curve in the US that can not be changed and that the demographic curve pre-determines the amounts of people "not working and taking current level payments" and that those working will be responsible to pay all the bills. Another assumption is that current costs escalated for inflation over time and adjusted by numbers in the future age group are a good predictor of future costs.

Between now and then, I think that the US will reduce the Social Security benefits and try to find a way to reduce the increase in Medicare cost. I also expect that the US will encourage a "brain drain" from the rest of the world and change the US imigration policy to significantly modify the the demographic curve (i.e. if you are a 25 to 30 year old doctor or professional with a large family of small kids you are welcome to come to the US and get expedited citizenship, if you are over 50-forget it!) of who is paying for what. When faced with a problem of this magnatude, I suspect that politicians of all parties, will figure out creative ways to change things.

Another outcome, which I find very frightening will be the enouragement of doctor assisted suicide. If you look at typical medical care costs, they get higher when a person gets older, but they skyrocket when that person needs constaint nursing home care and/or hospitalization at the end of life. I think that there is likely to be a change in the last weeks/months of life medical ritual that has developed over the last 30 years in the US. I don't see the Government paying the bill for people to die in a hospital in the future, I think folks will be "encouraged" to die at home. How the "enouragement" occurs and how they "die" is the part that scares me.