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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.
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?
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.
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?