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To moderate the optimistic view -- that Social Security payroll taxes need be only increased by an employer-employee combined total of about 2.07 percent of payroll (non71) -- one must understand that all of the surplus SS revenues of the past decades have been loaned to the Treasury general fund; and under current law this practice will continue in the future. In exchange, for the loan, the SSTF is given Special Issue Treasury obligations (SIT obligations) which are government bonds of a special kind. The Treasury general fund then takes all of the money that it has borrowed from SS, and spends it on current general federal programs. (Actually, now that we have qualified unified budget surpluses, the general fund is using some of the SS surplus to reduce the publicly - held debt).
In determining the financial future of SS, The Trustees' reports assume that the general fund will redeem all of the SSTF's bonds when needed, and does not concern itself with how the general fund will find the money to redeem these bonds (non122). The money that the general fund will have to raise in order to redeem the SSTF bonds is treated as an "external issue", and therefore is not counted as part of the future cost of SS.
With this assumption (that the cost to the general fund of redeeming the SSTF bonds is an "external issue", i.e. is ignored), the Social Security program is only 2.07 percentage points short of being "solvent" (i.e. of not running out of SIT obligations) through 2075. From the point of view of the Social Security Administration (SSA) and the Trustees, that is correct. But from the general taxpayer's point of view, this is ignoring one critical piece of information: where will the Treasury general fund get the money to pay back the SSTF?
Between 2014 and 2035 it is projected that the SSTF will need to cash in $7.8 Trillion worth of its bonds (non86) in order to pay benefits. The SSTF will present these bonds to the Treasury's general fund for redemption. The general fund will need to come up with $7.8 Trillion of real money somehow. The only way it can do that is by measures such as raising income taxes, or cutting federal spending in other areas. Or most likely, raise the cash by selling bonds to the public, and thereby pass on this debt to our descendants -- along with all the other debt that has been incurred in the past -- and any more debt in other areas that we are likely to incur in the next few decades. To the point where interest on the debt, let alone the debt itself could become unmanageable. Debt financing is just a deferred tax increase.
Yes, as of this writing, in August 1999, there are projections of multi-trillion dollar surpluses over the next 15 years (primarily consisting of SS surpluses). But these surpluses are fragile (depending on a continuation of the Goldilocks economy, maintenance of the unrealistically tight budget spending caps, no big tax cuts, continued low defense spending, etc.) -- see section non49 for more about the fragile surpluses. Nor do the projections that I have seen extend beyond 15 years -- when the first boomers begin to reach 65 and when the SS begins to run operating (cash) deficits. And regarding SS and Medicare, they will remain just as problematical as ever beginning with the boomers' retirements -- unless we actually save and invest the current surpluses in real economic assets, or at least use them to pay down the publicly-held debt.
See also section non72 for more detail on the 2.07 percent increase issue.
Currently, (all figures in this section are fiscal year 1998), with a $5.5 Trillion national debt (end of fiscal year 1998), interest on the debt is running about 364 B$ a year -- of which 243 B$ is interest on publicly - held debt (Treasury bills, notes, and bonds sold to the public), 7 B$ is "other interest" paid to the public, and 114 B$ is interest that the various government trust funds (such as Social Security, Medicare, and federal government worker pensions) are theoretically incurring. See non159 for the federal debt figures and section non155 for the interest - on - the - debt figures.
The interest on the trust fund debt is only theoretical (see section non102). Therefore, I will only count the 250 B$ interest on the 3,720 B$ of publicly - held debt and the "other interest" paid to the public. Interest paid to the public comes to a total of 250 B$ / 270 million people = $930 per capita per year. On a per-capita basis, that comes to a total of $3,700 per year per household of 4 people. That is astonishing -- an "average" household of four is paying $3,700 per year in extra taxes just to pay interest on the publicly - held national debt and "other interest" to the public. And if it bothers you, more than one-third of that is going to foreigners (see section non163).
(I've never seen the media or even deficit-reduction advocacy groups portray the national debt in such real personal terms. They usually portray it in terms of debt per capita, e.g. $5.5 Trillion / 270 million = $20,000 per person. People just shrug that off and think of it as a mortgage or even an investment. But when you tell them that the "average" household of four is paying $3,700 per year in additional taxes just to pay interest on the publicly-held debt, then it really hits home).
Think of it this way -- if we didn't have the national debt, we could cut taxes by $3,700 per "average" household of four.
Do you think federal taxes are too high? Would your household of four like a $3,700 tax cut? Then pay down the national debt. Would your household of four like a $3,700 tax increase? Then run up an additional $3.7 Trillion in national debt (The national debt, including the trust fund debt, went up by $5 Trillion in just 25 years -- from $0.5 Trillion in 1975 to 5.6 Trillion now. That's an 11-fold increase in 25 years, by the way).
((In the 2nd edition I will put together historical debt and interest - on - debt figures broken into gross federal debt, publicly-held debt, interest on these two components, and even foreign ownership. And in B$ and %GDP)).
In all honesty, because of the highly skewed distribution of incomes (e.g. median income is much less than average income), and because of the progressive nature of the income tax system (higher incomes pay higher tax rates), the household of four with the "average" income tax burden -- when calculated by: ( total income taxes / total U.S. population ) * ( 4 people / household ) -- is a very well - to - do household. Unfortunately, I don't know of any generally accepted way to calculate the tax burden on a median income household of four. ((I've made a 2nd edition note to find out)).
Another reason why the national debt matters is the safety margin argument. The economy can incur only so much debt. As the debt increases, the interest on the debt increases (both because there is more debt to pay interest on, and because higher interest rates are positively correlated with higher debt). Eventually, taxes must be increased in order to pay interest on the debt. Furthermore, selling a lot of government bonds to investors crowds out money that would otherwise be invested in the private sector. There comes a point somewhere that these factors combine to slow the economy to the point where tax revenues are adversely affected, and some sort of economic vicious circle begins. (Countries that have reached this point usually end up printing more money, causing severe inflation.)
With a $5.6 Trillion debt, I don't think we are anywhere near the point of a negative death spiral. But we may be half-way there. On top of this debt, we might not be able to manage the additional debt that would be caused by a World War II - sized conflict or a decade - long economic depression like the 1930s.
Yes, I'm aware of the argument that the debt isn't bad because we owe the money to ourselves. That is, the taxpayer is paying higher taxes to pay interest, but at the other end is a citizen receiving the interest. So it is really just a transfer payment or redistribution from citizen to citizen.
There is also the cynical argument that high debt is good (James K. Glassman) -- because the citizen who receives the payment, a bond-holder, is usually well-off, and thus likely to reinvest the payment in something productive, thus growing the economy. Whereas the average taxpayer is less well-off and would probably just spend the money on current consumption if he didn't have to pay it in taxes.
But this line of argument does not take into consideration that selling the government bonds in the first place crowds out other uses for investor's money. And, there comes a point where the great mass of people don't have enough take-home money left over to be able to consume all that the investors' factories produce (the U.S. in the 1930's, Japan in the 1990's. Well, Japanese consumers have a lot of money, but are too concerned about economic conditions to spend it). Finally, bear in mind that $1.2 Trillion of publicly held debt (about 1/3 of the publicly held debt) is held by foreigners. And 91 B$, or 36% of the federal government's interest payments on the publicly - held debt is being paid to foreigners. So a sizable chunk of our interest payment on the national debt is a transfer payment from taxpayers to foreigners. See section non163 for more on foreign ownership of the federal publicly-held debt.
It is frustrating to me that the media, from what I've seen, only talks about the "2.07 percentage point gap", and SSTF "solvency", but never talks about the impact on the general taxpayers (primarily individual income tax payers) of raising the $7.8 Trillion to redeem the SSTF's bonds.
See also section non135 on government official and media misinformation about the status of Social Security, particurlarly the half - truths about the Social Security trust fund.
I should put the $7.8 Trillion in perspective. It is a huge number, but it is spread over 21 years with the largest portions occuring in the last years of the period. The $7.8 Trillion over the 2014-2034 period is equivalent to a lump sum of $1.5 Trillion in the year 2000 (using an interest rate of 6.3% (see section non253) and present - worthing it).
If that amount is amortized over the 34 year period 2000-2034, then it comes to $108 Billion / year. That's not so bad relative to a $2000 Billion federal budget (non136) (revenues are expected to first exceed $2000 Billion in 2002, and spending is first expected to exceed $2000 Billion in 2005, per the CBO's January 1999 forecast, Summary Table 3 p. xviii {18} in E&B0199.pdf). And the $108 Billion / year stays flat (that's what amoritization means), so the $108 Billion / year will be smaller and smaller relative to the budget and the GDP in the future, both of which will continue to grow (due to inflation, population increase, and productivity).
While it's not a disaster, it's an issue and an amount that is almost always never brought out in media discussions of Social Security. And, as the next section discusses, Medicare taxes (in some form or another) will also have to increase.
One needs to also consider the picture of what happens after 2034. But that is already factored into the 2.07% number.
See also section non67 for more discussion on the topic of $7.8 Trillion in perspective.
On top of the problem of Social Security is the problem of Medicare. Since this is a summary, I'll just present a summary table. In Table T30.1, the costs of Social Security and Medicare are presented as a percent of GDP projected for those years. In Table T30.2, the costs of Social Security and Medicare are presented as a percent of payroll. These are all numbers from the March 30, 1999 Social Security Trustees Report and the March 30, 1999 SMI Trustees Report.
Table T30.1
Cost Rates Expressed As % Of GDP
------------------------------------
Cal. SocSec ------Medicare----- SocSec+
Year (OASDI) HI SMI Total Medicare
1999 4.45 1.56 0.98 2.55 7.00 %
2040 6.88 2.73 2.53 5.26 12.14 %
2050 6.79 2.80 2.46 5.26 12.05 %
2070 7.02 3.02 2.65 5.67 12.69 %
Table T30.2
Cost Rates Expressed As % Of Payroll
------------------------------------
Cal. SocSec ------Medicare----- SocSec+
Year (OASDI) HI SMI Total Medicare
1999 10.80 3.10 1.95 5.05 15.85 %
2040 18.18 5.79 5.37 11.16 29.34 %
2050 18.28 6.06 5.32 11.38 29.66 %
2070 19.63 6.78 5.95 12.73 32.36 %
In above, Medicare = HI + SMI. Also, OASDI is synonymous with Social Security. See also footnotes to these tables, non31, particularly regarding the SMI program, which in reality is not financed by payroll taxes. (However, OASDI and HI are almost entirely financed by payroll taxes).
What Table T30.1 above says is that Social Security and Medicare are expected to consume 12.14% of GDP in year 2040, compared to 6.97% of GDP today. What Table T30.2 above says is that if we were to finance all of Social Security and Medicare with payroll taxes, and if we were paying the costs of the programs on a strictly pay-as-you-go basis (as we have been doing), payroll taxes would have to be nearly doubled, from 15.85% today to 29.34% in 2040.
The SMI number came from Table III.A1 in SMI99 as % of GDP.
HI as % of GDP is given in Table III.C1 in TR99 and also in Table III.A1 in SMI99.
OASDI as % of GDP is given in Table III.C1 in TR99.
OASDI and HI numbers came from Table III.A2 in TR99.
The SMI number came from Table III.A1 in SMI99 as % of GDP. I converted to % of payroll by using the same ratio of %GDP to %payroll as for the HI numbers. (HI as % of GDP is given in Table III.C1 in TR99 and also in Table III.A1 in SMI99. HI as % of payroll is given in table III.A2 in SMI99).
(SMI, also known as Medicare Part B, is not financed by a payroll tax, but rather is funded from the general fund of the treasury and from monthly premiums. But I converted the SMI cost to a payroll tax percentage so as to be on a comparable basis with the OASDI and HI portions of senior benefits, which are financed by payroll taxes).
The ratio of %GDP to %payroll is different for OASDI than for Medicare because there are a significant number of people exempt from the Social Security system who are not exempt from the Medicare system.
Table T30.2 indicates that eventually payroll taxes will have to be doubled (or other equivalent fiscal sacrifices made), in order to continue to pay for Social Security and Medicare on a pay - as - you - go basis. That sounds horrific. On the other hand, even the "dismal" Trustees' Intermediate Forecast projects that real wages and real GDP per capita will grow. (See section non234 on the subject of whether the Trustees' Intermediate forecast is "dismal"). So that even with higher taxes, real take-home pay will increase. And thus living standards will increase. In that sense (and given that the Trustees' intermediate forecast or better occurs), senior entitlements are not a problem. Section non73 shows that given the Intermediate projection and payroll tax rates equal to the cost rates in Table T30.2, the average worker enjoys a real increase in take home pay of 26% between 1999 and 2040, and another 27% between 2040 and 2070.
The Concord Coalition argues that the Trustees' Intermediate projections are too optimistic, and that the Trustees' "High Cost" forecast is more in keeping with historic trends. Some of this is discussed in section non234. If the high cost scenario occurs, then Social Security and Medicare costs will be very difficult to bear.
Others, such as United for a Fair Economy (www.stw.org) and the Economic Policy Institute (www.epinet.org) argue that there is no cause for optimism about economic growth and real wage improvement. They purport to show that wages, household income, and household wealth have been declining in real terms in the last 20 or 30 years. You know the old lament about how it takes two earners to support a household when only one earner was needed 30 years ago. Thus, they are skeptical about any projections, like the Social Security Trustees' projections, that forecast significantly rising real wages. As an example of the view that the middle and lower classes are backsliding economically, see the discussion of the United for a Fair Economy "Shifting Fortunes" report at section non206.
Some people fault the Social Security Trustees' Intermediate projection in TR99 as being very pessimistic with respect to real GDP growth -- about 1.3%/year after 2020 -- which is considerably less than the historic rate of real GDP growth.
In the 1960s, real GDP grew at a rate of 4.4%/year. In the 1970s, 3.5%/year. In the 1980s 2.7%/year. In the most recent 10 year period, 1989-1998, the real GDP grew at 2.4% per year. See section non35 for more on the real GDP growth rate.
However, the Trustees explain that the forecast GDP growth is low because the growth in the labor force is expected to be very low -- 0.2% per year after 2020, and 0.1% per year after 2050 (See Table T234.1).
This issue, as well as the Trustees' demographic and economic parameters are discussed in section non234. Productivity growth is discussed in section non241.
The real GDP growth rate figure of 2.4% / year for 1989-1998 comes from TR99, page 54 {70}. Table II.D1 on page 58 {74} of TR99 has real GDP growth figures by year, from 1960 to 1998.
I used the II.D1 information and the complex but accurate formula, non255, to come up with composite real GDP growth rates for the decades 1960-1970, 1970-1980, 1980-1990, and 1990-2000. These are presented in column A below.
A less accurate way to come up with the average growth rate for a decade is simply to sum up the appropriate 10 yearly growth rates and divide by 10 (simple average). This I did in column B below. Column B is a sanity check on column A.
Real GDP Growth Rate
In % / Year
--------------------
Accurate Simpler
Formula Formula
A B
-------- -------
1960s 4.4 4.4
1970s 3.5 3.5
1980s 2.7 2.8
1989-98 2.6 2.6
1990s 2.5 2.7
Below here are Intermediate Forecast real GDP growth rates
for individual years, in % / year:
2000-07 2.0 (all years are 2.0)
2008 1.9
2010 1.8
2020,30,40 1.4
2050,60,70 1.3
2075 1.2
The 1990s include a 1998 figure of 3.9%, which is preliminary. And it includes a 1999 figure of 2.6% and a 2000 figure of 2.0%, which are both forecasts.
For 1989-1998 note that I calculate 2.6%, while the text on page 54 said it is 2.4%. I don't know the reason for the discrepancy, except that I'm using figures from II.D1, which are only given to one decimal place (two significant digits). So an error of 0.2 is not surprising. There is a no table of historic Real GDP in Billions of Dollars anywhere in TR99 that I could find, which would allow for more accurate calculations.
The figures 1999 and beyond are from the Intermediate forecast.
(hits since Sept 16, 1999)
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