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The Insolvency of Social Security and Medicare

Discussion in 'Front Porch Chat' started by Weedygarden, Nov 8, 2019.

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  1. Nov 8, 2019 #1

    Weedygarden

    Weedygarden

    Weedygarden

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    https://www.garynorth.com/public/20133.cfm

    The Insolvency of Social Security and Medicare: A Review
    Gary North - November 01, 2019

    I first began quoting the analysis of economics professor Laurence Kotlikoff back in 2012. He is a professor of economics at Boston University. He is among the nation's experts in the Social Security system.

    He is not just an expert in terms of the overall economics of the Social Security system. He is also one of the leading experts on how individuals can maximize their payments from Social Security. Here is a 2019 article on this that was published in Forbes.

    He has estimated that the unfunded liabilities of Social Security and Medicare are in the range of $210 trillion. He presented his findings to the Senate Budget Committee in 2015. His testimony is here. He began with these words.

    The Price of Delay

    Table 1 below shows the requisite tax hike or spending cuts needed to eliminate the fiscal gap if such adjustments are postponed into the future. Waiting, for example, for a decade to permanently raise revenues requires a 64.4 percent tax hike starting at that date. Alternatively, spending would need to be cut not by 37.7 percent, but by 40.4 percent starting in 2025. Obviously, the longer we wait to adjust, the worse the impact on our children and grandchildren. If, for example, we wait until 2035 before adjusting via tax hikes, we’ll sentence today’s newborns to lifetime tax payments that are 70.4 percent larger than would arise under current law.



    [​IMG]
    Our Nation’s True Deficit

    In 2013 the fiscal gap stood at $205 trillion. In 2014 it was $210 trillion. Hence the country’s true 2014 deficit – the increase in its fiscal gap – was $5 trillion, not the $483 billion increase in official debt reported by the CBO.

    Why did the fiscal gap rise so dramatically? A major reason is that the baby boom generation got one year closer to collecting what will ultimately be about $40,000 in Social Security, Medicare, and Medicaid benefits per person per year. Hence, the present value of these obligations rose due simply to interest. Stated differently, the fiscal gap is, in effect, our nation’s credit card bill and like our own credit card balances, the fiscal gap accrues interest. If we fail to pay interest on the fiscal gap it will get larger.



    I am honored to discuss with you our country’s fiscal condition. Let me get right to the point. Our country is broke. It’s not broke in 75 years or 50 years or 25 years or 10 years. It’s broke today. Indeed, it may well be in worse fiscal shape than any developed country, including Greece.
    He went on to explain why the federal government is technically bankrupt. You may be aware of this, but it never hurts to review. Obviously, it never hurts the Senate to review.



    Cooking the Books
    Congress’s economically arbitrary decisions as to what to put on and what to keep off the books have not been innocent. Successive Congresses, whether dominated by Republicans or Democrats, have spent the postwar accumulating massive net fiscal obligations virtually all of which have been kept off the books.

    Net fiscal obligations refers not just to formal and informal commitments to high future transfer payments, but also formal and informal commitments to low future levels of taxation. Spending six decades raising or extending transfer payments and cutting or limiting taxes helped members of Congress get reelected. But it has placed our children and grandchildren under a fiscal Sword of Damocles that gravely endangers their economic futures.

    The Fiscal Gap

    Economic theory is unequivocal in telling us what not to measure when it comes to fiscal sustainability and generational policy. It’s also crystal clear in telling us what to measure, namely the infinite-horizon fiscal gap. The infinite-horizon fiscal gap tells us whether the government has, over time, enough receipts to cover its projected spending. It equals the present value of all projected future expenditures less the present value of all projected future receipts.

    The infinite-horizon fiscal gap has five important properties.

    First, it puts everything on the books. All expenditures, regardless of whether they are called debt service, transfer payments, or discretionary spending are included in forming the present value of future outlays. It also puts all receipts on the books, including income the government receives on its real and financial assets.

    Second, the infinite-horizon fiscal gap takes on the same value regardless of what internally consistent labeling convention is used to characterize fiscal outlays and receipts. In contrast, any finite-horizon fiscal gap, such as the 75-year fiscal gaps calculated for the Social Security and Medicare programs, are, like the federal debt, creatures of nomenclature. I.e., they can be set to any value one wants simply by choosing the right fiscal labels.

    Third, a positive fiscal gap means the government is attempting to spend, over time, more than it can afford. Doing so violates what economists call the government’s intertemporal budget constraint. Hence, a positive fiscal gap is a direct measure of the unsustainability of current fiscal policy.

    Fourth, eliminating the infinite-horizon fiscal gap is a zero-sum game across generations. Hence, the fiscal gap tells us the fiscal burden that will be imposed on today’s and tomorrow’s children if current adults don’t pay more to or receive less from the government. Understanding the fiscal burdens our kids could face from the fiscal gap is called generational accounting.

    Fifth, the machinery of fiscal gap accounting tells us the size of the adjustment needed to balance the government’s intertemporal budget constraint and how the magnitude of the requisite adjustments depend on when the adjustment begins.

    The U.S. Fiscal Gap

    The U.S. fiscal gap currently stands at $210 trillion. This figure is my own calculation based on the Congressional Budget Office’s July 2014 75-year Alternative Fiscal Scenario (AFS) projection.

    What does this mean in terms of taxes?



    Our $210 trillion fiscal gap represents 58 percent of the present value of projected future taxes. Hence, eliminating the fiscal gap via tax hikes requires an immediate and permanent 58 percent hike in federal taxes. Stated differently, the overall federal government is 58 percent underfinanced.
    By way of comparison, the Social Security system, taken by itself, is 33 percent underfinanced. (I.e., its infinite-horizon fiscal gap, reported in table VIF1 of the 2014 Trustees Report, is 33 percent of the present value of projected Social Security taxes.) Another comparison is Detroit prior to declaring bankruptcy. The city appears to have been roughly 25 percent underfunded. Hence, the U.S. is in far worse fiscal shape than was Detroit before it went broke.

    Another option is to cut spending on all expenditures, apart from servicing official debt, to close the fiscal gap. Doing so requires an immediate and permanent 38 percent spending cut.

    Is this going to happen? In his testimony, he did not say that this is likely or unlikely. But when was the last time you recall a major spending cut in any program of the federal government?
     
    Bacpacker, angie_nrs, Woody and 3 others like this.
  2. Nov 8, 2019 #2

    Sentry18

    Sentry18

    Sentry18

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    Yes! This! We could take a 38% spending cut and not even effect anything critical, important, or even semi-important.
     
  3. Nov 8, 2019 #3

    hiwall

    hiwall

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    For many years Congressmen have known a secret - Spending buys votes and cuts lose votes. There will be no cuts and really it is too late for that anyway.
    We are now poised for another recession. This is totally natural as recessions come and go on a somewhat regular basis. Many think this recession will be much worse (though obviously that is just a guess).

    The Federal Reserve is doing everything they can to temporarily hold things together. They have dropped interest rates, they have restarted QE (but only 60 billion per month currently), and they have really started lending money to banks with their repo operations. Today was a slow day for the repo with the Fed only giving out 70 billion dollars today to the banks. A day or two ago the daily amount was 115 billion though it has been averaging around 70 billion per day.

    You can see how much it is per day here ... https://apps.newyorkfed.org/markets/autorates/temp

    Since the last QE program the Federal Reserve did get some of the money off their balance sheet (they peaked at 4-1/2 trillion) but now they have already brought their balance sheet up to that again. The repo operation is adding billions per day.

    Countless financial indicators are pointing to a recession within a year. It is coming.
     
  4. Nov 8, 2019 #4

    Weedygarden

    Weedygarden

    Weedygarden

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    I have a friend who has been working in real estate up until a month or so ago. Her company is having problems making ends meet, so they have been firing people for minor infractions. They needed to cut the fat. We talked about how all of a sudden there are several homes for sale in her neighborhood, when not too long ago, there was nothing.

    She told me she knows of 3 different people who have bought real estate for the purpose of investments, owning 30 to 40 homes each. These three people have decided that they need to sell of their property because they are expecting they will lose them otherwise. So these are 3 people she knows of. What else is out there that she has no idea about?

    It is going to be rocky for a while.
     
    Bacpacker, hiwall, phideaux and 2 others like this.
  5. Nov 8, 2019 #5

    VirginPrepper

    VirginPrepper

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    I am not worried. The Government will take care of my every need, after all that is what governments do, is look after the wellbeing of everyone, and keep us all safe and well fed. The Dept. of Homeland Security even has nice camps that we can go to, and be warm-safe-comfortable-well nourished. No need to worry.
     
  6. Nov 8, 2019 #6

    Amish Heart

    Amish Heart

    Amish Heart

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    Ha Ha VP
    Don't get on the bus.

    Husband is on the phone right now discussing Medicare supplement options. What a racket.
     
    Terri9630, Bacpacker and Sentry18 like this.
  7. Nov 8, 2019 #7

    VirginPrepper

    VirginPrepper

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    Or into the "BOXCAR".
     
  8. Nov 8, 2019 #8

    hiwall

    hiwall

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    Silver went down today. I couldn't help myself and I bought more.:)
     

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