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IntelDigest
LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR
JULY 18, 2018
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We continue the “Summer of Debt” … actually, it’s just our series on Debt, and the many problems coming to our economy as a result of Debt … in this issue of IntelDigest.
This week, we will address specific aspects of U.S. government obligations. Next week, we will discuss individual Debt, including mortgages, credit cards, student loans, et al.
As we wrote last week, government borrowing has reached historic levels. Today, the U.S. government owes more than 21 Trillion Dollars. As of today, the number is approximately $21.2 Trillion, equal to about 105% of Gross Domestic Product (GDP).
Add in state and local debt, which amounts to another $3.1 Trillion … the total government Debt in the U.S. currently stands at $24.3 Trillion, more than 120% of GDP.
However, those Trillions of Dollars represent only the “official, on-the-books” Debt.
Unfunded Liabilities
The “official” federal Debt does NOT include “Unfunded Liabilities” … promises made to many people WITHOUT putting aside money to pay for those promises. In fact, Uncle Sam has made many many promises to many many people, with little regard for its future ability to fulfill them.
These, too, represent Debt of the federal government, piled atop obligations already appearing on the national balance sheet. Worse, generations of American citizens have planned their retirements based on the government fulfilling those promises.
What happens to millions of our citizens If those promises are not met?
Social Security and Medicare
You may be thinking, “wait a minute … Social Security and Medicare have been funded through payroll contributions by both employers and their employees. What about the trust funds full of those contributions?”
Those “trust funds” are really just an “accounting fiction.” Social Security and Medicare tax payments are deposited in the general fund of the United States, and the government leaves an IOU in the “trust.”
Think of it this way: You have saved $100,000 for your child’s college education. BUT, you have borrowed all that money to pay for your car or mortgage or vacations. You can pretend that the money is still there to pay for future college costs, but what do you do when the first tuition bill comes in? You will have to make college payments out of your then-current income stream, or liquidate other assets.
That, in a nutshell, is the government plan for paying future Social Security and Medicare benefits.
It is true that the dedicated revenue streams from payroll taxes, and premiums paid in by Medicare recipients, have covered current expenditures to date, and built up some reserves, However, those income streams are about to go negative. Going forward, current income will not be enough to pay all current benefits.
With both programs going into negative cash flow, the U.S. Congress must now take action to provide additional cash to pay the promised benefits. The annual trustee report has estimated that Social Security will run out of reserves in 2034, and the hospitalization part of Medicare will go dry in 2026.
The Semantics of Assumptions
Having already “borrowed” all the money in the Social Security and Medicare trust funds, the federal government is being disingenuous in projections of “running out of reserves” in 2034 or 2026. The government has already used all “reserves,” and will have to pay future benefits out of then-current income.
But, as an academic exercise, let’s play the “assumptions game.” How did the government determine that the Social Security “reserves” will last until 2034, and Medicare reserves until 2026? These estimates are based on lots of assumptions.
To estimate revenue, government economists must know how many workers are in the United States, their wages, and at what rates those wages will be taxed. To estimate expenses, they must know how many retirees will be drawing benefits, the amount of those benefits, and how long the retirees will live to receive them. They also have to assume an inflation rate on which the cost-of-living adjustment is based. A small deviation in any of those can have huge long-term consequences.
The government estimates that Social Security has a $13.2 Trillion unfunded liability over the next 75 years. That is the amount of benefits which the government expects to pay, minus the revenue expected to come in.
Medicare projections require even more assumptions: what kind of treatments the program will cover, how much treatment senior citizens will need, and what those treatments will cost. All these could vary wildly, but the “official” assumptions put the Medicare 75-year unfunded liability at $37 Trillion. It could be vastly more. Or, if medical science finds ways to keep us healthier in the future, then healthcare costs could be less, as could the total unfunded liability.
But, the current assumptions indicate total unfunded liabilities of approximately 50 Trillion Dollars!
Of course, this scenario depends on government assumptions being spot on (unlikely), and the United States averting wars and other political conflicts which could blow these assumptions out of the water!
Economist Laurence Kotlikoff and financial columnist Scott Burns addressed these issues in their book, The Clash of Generations: Saving Ourselves, Our Kids, and Our Economy. They take a rather dim view of our elected representatives, writing that the “… only truly bipartisan cooperation in Congress is that both sides lie.” And, that any time a politician talks about putting a “lock box” around Social Security or Medicare trust funds, he or she is either staggeringly ignorant or lying.
By the way, Professor Kotlikoff estimates the unfunded liabilities to be closer to $210 Trillion!
Summary
So, at a minimum, we can probably assume that Social Security and Medicare add another $50 Trillion of Debt on top of the $21.2 Trillion (and growing) on-budget federal Debt.
By the way, none of the foregoing discussion includes civil service or military retirement obligations, or the federal government backing for some private pensions under the Pension Benefit Guaranty Corporation, or open-ended guarantees like FDIC, Fannie Mae, et al.
What solution will Congress provide for angry retirees who think they have already “paid” for their benefits? Can they make strategic modifications (benefit cuts) to these so-called “entitlement” programs to extend their efficacy?
In reality, arguing over whether it’s a $50 Trillion or $200 Trillion problem is pointless. Congress will have to act … rather sooner than later … to cut spending or raise taxes, or some combination of both.