Below is an excerpt from the September issue of ‘Moving Markets’, my periodic market update. For a complimentary copy, click the link at the end.
Despite the fact that we’ve borrowed our way to ‘prosperity’ over the past 20+ years, we’ve now, I believe, reached our limit. The system can’t handle any more debt. The deflationary environment in which we find ourselves is a result of this massive debt load. And, in spite of the politician’s best efforts, we can’t borrow our way out of this one.
Let me put this debt burden in perspective.
If you visit the Treasury Department’s website, you’ll find that our national debt is currently estimated at about $11.8 trillion (Source: National Debt Clock, September 2, 2009). But, if you believe that, I’ve got a bridge to sell you.
The national debt doesn’t take into account the unfunded liabilities of social programs, Medicare and Social Security to name the two biggies. When you add in the unfunded liabilities of these two programs, paying the $11.8 trillion is a walk in the park. This from “Forbes” magazine this year (May 15, 2009) (emphasis mine):
This week, the federal government published two important reports on long-term budgetary trends. They both show that we are on an unsustainable path that will almost certainly result in massively higher taxes.
The first report is from the trustees of the Social Security system. News reports emphasized that the date when its trust fund will be exhausted is now four years earlier than estimated last year. But in truth, this is an utterly meaningless fact because the trust fund itself is economically meaningless.
The 2010 budget, which was finally released this week, confirms this fact. As it explains in Chapter 21, government trust funds bear no meaningful comparison to those in the private sector. Whereas the beneficiary of a private trust fund legally owns the income from it, the same is not true of a government trust fund, which is really nothing but an accounting device.
Most Americans believe that the Social Security trust fund contains a pot of money that is sitting somewhere earning interest to pay their benefits when they retire. On paper this is true; somewhere in a Treasury Department ledger there are $2.4 trillion worth of assets labeled “Social Security trust fund.”
The problem is that by law 100% of these “assets” are invested in Treasury securities. Therefore, the trust fund does not have any actual resources with which to pay Social Security benefits. It’s as if you wrote an IOU to yourself; no matter how large the IOU is it doesn’t increase your net worth.
This fact is documented in the budget, which says on page 345: “The existence of large trust fund balances … does not, by itself, increase the government’s ability to pay benefits. Put differently, these trust fund balances are assets of the program agencies and corresponding liabilities of the Treasury, netting to zero for the government as a whole.”
Consequently, whether there is $2.4 trillion in the Social Security trust fund or $240 trillion has no bearing on the federal government’s ability to pay benefits that have been promised. In a very technical sense, it would lose the ability to pay benefits in excess of current tax revenues once the trust fund is exhausted. But long before that date Congress would simply change the law to explicitly allow general revenues to be used to pay Social Security benefits, something it could easily do in a day.
The trust fund is better thought of as budget authority giving the federal government legal permission to use general revenues to pay Social Security benefits when current Social Security taxes are insufficient to pay current benefits–something that will happen in 2016. Effectively, general revenues will finance Social Security when the trust fund redeems its Treasury bonds for cash to pay benefits.
What really matters is not how much money is in the Social Security trust fund or when it is exhausted, but how much Social Security benefits have been promised and how much total revenue the government will need to pay them.
The answer to this question can be found on page 63 of the trustees report. It says that the payroll tax rate would have to rise 1.9% immediately and permanently to pay all the benefits that have been promised over the next 75 years for Social Security and disability insurance.
But this really understates the problem because there are many people alive today who will be drawing Social Security benefits more than 75 years from now. Economists generally believe that the appropriate way of calculating the program’s long-term cost is to do so in perpetuity, adjusted for the rate of interest, something called discounting or present value.
Social Security’s actuaries make such a calculation on page 64. It says that Social Security’s unfunded liability in perpetuity is $17.5 trillion (treating the trust fund as meaningless). The program would need that much money today in a real trust fund outside the government earning a true return to pay for all the benefits that have been promised over and above future Social Security taxes. In effect, the capital stock of the nation would have to be $17.5 trillion larger than it is right now. Alternatively, the payroll tax rate would have to rise by 4%.
To put it another way, Social Security’s unfunded liability equals 1.3% of the gross domestic product. So if we were to fund its deficit with general revenues, income taxes would have to rise by 1.3% of GDP immediately and forever. With the personal income tax raising about 10% of GDP in coming years, according to the Congressional Budget Office, this means that every taxpayer would have to pay 13% more just to make sure that all Social Security benefits currently promised will be paid.
And that’s just Social Security. If we use “Forbes” number of $17.5 trillion and add it to the $11.8 trillion that the government will admit to, the national debt is now $29.3 trillion. But, don’t forget Medicare.
According to a February 23, 2008 article in “The Wall Street Journal” Medicare’s unfunded liabilities according to the program’s own trustees is $74trillion.
Let’s do some math:
$29.3 trillion = admitted national debt plus unfunded Social Security liabilities
$74 trillion = unfunded Social Security liabilities
$103.3 trillion true national debt
Choking yet?
I’ll bet you the biggest steak in Texas that the majority of congress wouldn’t know how many zeroes to add to that number. Any takers?
Here’s some rudimentary math. There are about 300 million people who live in the United States. Divide this debt burden of $103.3 trillion by the 300 million who will have to pay the bill and each of us, every man, woman, and child in the US owes $344,000.
Now I know you’re choking.
Amazingly, as badly as the politicians have mismanaged the programs we’ve entrusted to them, they now want to take over healthcare, proposing a ‘public option’ administered by the government.
Even more amazingly, this whole concept is being proposed while the Obama administration is projecting trillion dollar deficits for as far as the eye can see.
Keep disrupting those town hall meetings.
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