This is a partial transcript of "Special Report With Brit Hume" from Dec. 29, 2005, that has been edited for clarity.

JIM ANGLE, GUEST HOST: The first of the baby boomers turned 60 in the new year. The good news is they are expected to live longer. Unfortunately, that is also the bad news. Because the number of seniors collecting automatic benefits called entitlements is going to explode. That may bankrupt the rest of the federal government, or mean a huge increase in taxes.

How bad is it? And what can be done about it? For answers, we turn to Douglas Holtz-Eakin and director of the Congressional Budget Office at the end of his last day on the job. Doug, thanks for joining us.

DOUG HOLTZ-EAKIN, CBO DIRECTOR: My pleasure.

ANGLE: You made it three years at the Congressional Budget Office where your responsibility is to give hard numbers to people who are trying to make political arguments — sometimes those numbers puncture partisan arguments about things. You were the skunk at the congressional federal spending party, weren’t you?

HOLTZ-EAKIN: Indeed, that’s the job. I hope I did it well.

ANGLE: Well, and you look like you survived.

Now let me ask you about what we’re talking about here, the problem with the number of people — we’ve got a graphic I want to show you about the number of retirees to workers. It used to be in the old days, there were a lot of workers for every retiree. You can see here back in the 40’s, there’s 42 workers for every retiree. 1950 it dropped to 17. Now, it is down to 3, and it’s going to 2. Now that suggests that all of those of us who will be retired in those will have 2 workers, basically, supporting us and paying for all those entitlements we are going to be collecting — Social Security, Medicare, all that sort of thing.

HOLTZ-EAKIN: Yeah. And I think the real lesson is that you can’t just look back and say, geez, this used to work before. We’ll just do it again. It will be fine in the future. At the beginning when there was a baby boom entering the labor force, you could pay the promised benefits and even add benefits, and it looked fairly painless. Now we are going the other direction and it’s really going to be necessary to rethink these programs for a new population, for a population that is permanently older and permanently has fewer workers for every retiree.

ANGLE: Now, let’s look at how big a mess is waiting us. We’ve got Medicare, we’ve got Medicaid which pays for nursing home care for poor seniors. There was another graphic where you had that shows you how much these will take up. Now you look at Social Security, Medicare, Medicaid as percentage of total federal spending, in 2000, about 40 percent. That is scheduled to double by 2040. Some say even sooner, to about 80 percent.

Now that suggests that if those programs are taking up 80 percent of federal spending that every other program from NASA to military spending to environmental programs, to health care, hurricane relief, all of those programs will be fighting over one in five federal dollars?

HOLTZ-EAKIN: Yeah. It’s a real lesson for those who are watching Congress. We just saw a story about how Congress passed some bills at the end of the session. Those are the annual appropriations bills. They are now 1/3 of all federal spending. They are a relatively tiny fraction. Very soon, two programs — Medicare, Medicaid, the health programs, and Social Security are going to be more than half of all federal spending and they are growing very, very fast. So that’s where the action is. And that’s where the important decisions have to be made.

ANGLE: Now, the important decisions are tough. I mean Congress ground to a halt, talking about $5 billion a year in spending cuts, to some of these programs, when in fact we are talking about a budget of trillions. How hard is it to get moving on some of these issues?

HOLTZ-EAKIN: I think it’s very hard. And quite frankly, the numbers that were involved this year were under one percent of federal spending and not terribly impressive in their magnitude.

The important thing is that Congress was talking about the programs that are the future of the federal budget. And indeed, are the future of deciding how robust our economy will be. That’s the good news.

Now, going forward, I think it will be better. We’ll have a more informed and productive debate if the debate is not about how do we cut back these programs, but rather what programs do we want for the year 2040, for the population in the year 2040? And how big will they be? How generous will they be? How will they be paired up with responsibilities?

ANGLE: I guess the bottom-line here it sounds like is that the current structure that we have is unsustainable.

HOLTZ-EAKIN: Yes. Many times, I’ve used the analogy to airline or autopilot. While fiscal autopilot is not an option. Something has to be done, someone has to actively take controls and change the course we are on.

ANGLE: Now, one of the interesting things about Social Security, it is self sustaining, because we collect taxes and pay them out, but one — at least until we run out of money and start paying out more than we take in, or run out of the trust fund, isn’t enough to cover those obligations. One of the interesting things here is in about a minute left is around 2018 we start paying out more than we take in, the government has been borrowing that money for years. And the government starts to have to come up with first small numbers, then much bigger numbers every year to pay off the trust fund. How big a burden is that going to be?

HOLTZ-EAKIN: That’s going to be a very tough time. Right now Social Security is a cash cow. You go out a little over a decade and there’s going to be a moment when Social Security is going to come back to the rest of the federal budget instead of giving it money, it’s going to say, well I need help. And it’s going to find Medicare and Medicaid looking back at it and tough decision will need to be made.

ANGLE: And the hole will be pretty deep at that point.

HOLTZ-EAKIN: Well, the good idea would be to get ahead of the curve. Don’t wait until that time. Make some decisions now, especially on Social Security, so people know the plan.

ANGLE: But briefly, the longer we wait, the more draconian the fix.

HOLTZ-EAKIN: The longer you wait, the harder the fix.

ANGLE: Great. Doug Holtz-Eakin, thanks very much. Congratulations on surviving.

Watch "Special Report With Brit Hume" weeknights at 6 p.m. EST.

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