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Created 9/16/99 -- See fb-changes.html for what's new and a revision history.
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What the below table shows, is that, total spending on Social Security (OASDI), Medicare, and Federal Net Interest will be a little higher, expressed as a % of GDP, in 2050 (12.05%) than in 1999 (9.75%). That's a 24% increase (12.05/9.75 = 1.24). If all these costs are expressed as a percentage of payroll, total spending on Social Security (OASDI), Medicare, and Federal Net Interest will be a little higher in 2050 (29.66%) than in 1999 (22.51%). That's a 32% increase (29.66/22.51 = 1.32).
One should remember that it is assumed that the publicly - held debt is paid down by 2040. Also, not included in this analysis is the considerable increase expected in Medicaid costs (which pays for most nursing home costs for the elderly who have no other means to pay). So the bottom line is that the tax bite percentage is going to be considerably larger in the future than now, but not disastrously so. If there is real economic per capita growth and real increases in pay, and Intermediate projections or better come true, as section non32 discusses, then things should be O.K.
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Table T212.1
Cost Rates Expressed As % Of GDP
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Fed OASDI +
Cal. OASDI + Net Medicare
Year OASDI HI SMI Medicare Medicare Interest + FNI
1999 4.45 1.56 0.98 2.55 7.00 2.75 9.75 %
2040 6.88 2.73 2.53 5.26 12.14 0 12.14 %
2050 6.79 2.80 2.46 5.26 12.05 0 12.05 %
2070 7.02 3.02 2.65 5.67 12.69 0 12.69 %
Table T212.2
Cost Rates Expressed As % Of Payroll
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Fed OASDI +
Cal. OASDI + Net Medicare
Year OASDI HI SMI Medicare Medicare Interest + FNI
1999 10.80 3.10 1.95 5.05 15.85 6.66 22.51 %
2040 18.18 5.79 5.37 11.16 29.34 0 29.34 %
2050 18.28 6.06 5.32 11.38 29.66 0 29.66 %
2070 19.63 6.78 5.95 12.73 32.36 0 32.36 %
FNI = Federal Net Interest
OASDI = Social Security
Assumes the publicly held debt is paid down to zero by 2040.
The OASDI (Social Security), HI, SMI, Medicare, and "OASDI + Medicare" numbers come from Table T30.1 and Table T30.2 in section section non30. These in turn all originate from the Social Security Trustees and the SMI Trustees March 1999 reports.
Federal Net Interest is roughly interest on the publicly - held debt. It was 243 B$ in Fiscal Year 1998 actual, per the CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, January 1999, E&B0199.pdf. For this quickie analysis, I'm assuming that the federal net interest in calendar year 1999 will be the same -- 243 B$. That is a high - side estimate -- it is certain to be a little less, as some of the publicly - held debt will be retired during 1998 and 1999.
GDP (Gross Domestic Product) comes from Table III.B1 in the SS Trustees March 1999 Report (TR99). It is $8845 Billion for calendar year 1999 for the Intermediate forecast.
1999 Federal Net Interest as a % of GDP = 243 B$ / 8845 B$ = 2.75%
To convert "Federal Net Interest, % of GDP" to "Federal Net Interest, % of Payroll", I used the "Ratio of OASDI Taxable Payroll to GDP" from Table III.C2, p. 189 {205} in the SS Trustees March 1999 Report (TR99). For example, that number is 0.413 for calendar year 1999, Intermediate Projection. Thus, for 1999, Federal Net Interest as % of Taxable Payroll = Federal Net Interest as a % of GDP / 0.413. For other years, the Ratio is different. It is 0.379 in 2040, 0.372 in 2050, and 0.358 in 2070.
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The assets in the Social Security Trust Fund and the Hospital Insurance (HI) trust fund consist entirely of Special Issue Treasury obligations (SIT obligations). (With the exception that the DI trust fund has $48 Million in regular marketable securities rather than SIT obligations. The $48 million is less than 0.1% of the DI trust fund's assets).
The SIT obligations are non-marketable. That is, the Treasury cannot take any of these bonds and sell them to a bank or an American investor or a Japanese investor or anybody else. The only entity that will buy or redeem a SIT obligation is the Treasury. The only entity that has SIT obligations is the Treasury.
To show that I'm not making this up about them being non-marketable, the Social Security Trustee's Report of March 1999 (TR99), p. 35 {51}, calls them non-marketable too:
[Being SS Trustees Report Quote:] The Social Security Act authorizes the issuance of special public-debt obligations for purchase exclusively by the trust funds. The Act provides that these obligations shall bear interest at a rate equal to the average market yield (computed on the basis of market quotations as of the end of the calendar month next preceding the date of such issue) on all marketable interest-bearing obligations of the United States then forming a part of the public debt which are not due or callable until after the expiration of 4 years from the end of such calendar month. Beginning January 1999, in calculating the average market yield rate for this purpose, the Treasury incorporates the yield to the call date when a callable bond's market price is above par.
Although the special issues cannot be bought or sold in the open market, they are nonetheless redeemable at all times at par value and thus bear no risk of fluctuations in principal value due to changes in interest rates. Just as in the case of marketable securities, all of the investments held by the trust funds are backed by the full faith and credit of the U.S. Government. [End SS Trustees Report Quote]
The Treasury Department also labels the Special Issue Treasury obligations as "Nonmarketable", see for example, the "Table I -- Summary Of Public Debt Outstanding, January 31, 1999 And Comparative Figures For January 31, 1998 (Amount in Millions of Dollars)"
It shows each type of public debt security, the average interest rate on them, and the amount outstanding.
In the category of Nonmarketable debt, it shows this:
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Summary Of Public Debt Outstanding
Below is for January 31, 1999
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(amounts are in millions of dollars)
Interest Amount,
Rate, % $ Millions
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Nonmarketable:
Domestic Series 7.932 29,995
Foreign Series 7.030 34,122
R.E.A. Series 5.000 1
State and Local Government Series 5.744 164,460
United States Savings Securities 6.356 180,426
Government Account Series 6.849 1,866,255
Total Nonmarketable 6.731 2,275,260
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From somewhere else, I've found that the Special Issue Treasury obligations that are in the Social Security Trust Fund and the HI (Medicare Part A) Trust Fund are in the Government Account Series category.
This page also has a great summary of the debt:
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Summary Of Public Debt Outstanding
Below is for January 31, 1999
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(amounts are in millions of dollars)
Interest Amount,
Rate, % $ Millions
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Total Marketable 6.423 3,292,804
Total Nonmarketable 6.731 2,275,260
Total Interest-bearing Debt 6.550 5,568,063
Total Noninterest-bearing Debt 42,054
Total Public Debt Outstanding 5,610,117
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The SSA actuarial Note #142 of January 1999 goes into great detail about the SIT obligations and why the trust funds consist almost exclusively of these obligations. The document generally calls them "special obligations". Here are some excerpts from the document:
[Begin SSA-142 quotes:] Trust fund assets may be invested only in obligations issued or guaranteed by the U.S. government. The assets of the trust funds must be invested in obligations of the United States government or in obligations guaranteed as to principal and interest by the United States. These obligations may be acquired {1} on original issue at the issue price, or {2} by purchase of outstanding obligations at the market price.
Special obligations are the preferred investment vehicle. Prior to 1960, the law had generally given preference to the purchase of marketable obligations. Actual practice, however, was to invest largely in special obligations, because purchase of marketable obligations was viewed as potentially disruptive to capital markets
The legal and administrative policies that have governed the investment of trust fund assets appear to be premised on four interrelated principles. These principles are: {1} non-intervention in the private economy; {2} investment only in financially secure instruments; {3} maintenance of general neutrality in the financial dealings between the trust funds and the general fund of the Treasury; and {4} minimal, or non-active, management and investment decision-making by the Managing Trustee.
The principle of non-intervention is also reflected in the creation and use of non-marketable, special obligations as the primary investment vehicle for the funds. Although statutory policy has always permitted investment in marketable U.S. obligations and, in fact, favored it in some of the earlier years of the program, the consistent administrative policy has been to invest trust fund assets almost exclusively in special obligations. This practice was adopted, at least in part, to avoid the market disruptions that might result from the purchase or sale by the trust funds of large blocks of marketable U.S. obligations in the open market and the appearance of U.S. government interference in open market operations of the Federal Reserve. [End SSA-142 quotes]
Here is what Michael Hodges, author of the Grandfather web pages, has to say about the status of these SIT obligations. (I have not found the source of these statements regarding the Federal Reserve's characterization of these obligations. I wrote to Michael about it once, and he did not respond. But having studied his web pages, I trust him enough to not make something like this up. Once I get this web page up, I will write him again):
[from Hodges' soc_sec_b page: ] " . . . pieces of paper that even the Federal Reserve does not recognize as legal debt - not official Treasury Bonds like those bought and sold by the public, but internal paper they call 'special issues' "
[from Hodges' deficit-trusts page: ] ". . . The Federal Reserve Bank doesn't even recognize those internal IOUs as official debt because they are not marketable and because there is no plan to pay it off. If you borrowed against your own (or your mother's) private pension and spent it all to pay for your current life-style what would be available come old age? Well, that's what we did to your trust funds)" [end Hodges' quotes]
It must be emphasized that the SIT obligations are guaranteed by the Federal government, and backed by the full faith and credit of the U.S. government, per some of the above quotes and this quote from the SS Trustee's Report:
[SS Trustee's Report Quote, p. 26 {42}:] Trust fund assets are generally invested in special Treasury securities so that the excess of cash receipts over expenditures is borrowed from the trust funds by the general fund of the Treasury and used to help meet various Federal outlays, or to reduce the amount of publicly-held Federal debt. These securities are backed by the full faith and credit of the U.S. Government, the same as other public-debt obligations of the U.S. Government. The assets of the trust funds can be redeemed for cash at any time if required to meet program expenditures. The redemption of a Treasury security held by a trust fund requires that the Treasury transfer cash --obtained from another revenue source, such as income taxes or borrowing from the public -- to the trust fund. Thus, the investment operations of the trust funds result in various cash flows between the trust funds and the general fund of the Treasury. [End SS Trustee's Report Quote].
There has been a lot of discussion in the alt.politics.economics newsgroup about whether the SIT obligations, which are non-marketable, are any less valuable than marketable Treasury securities that are sold to the public. The argument being that both are backed by the full faith and credit of the U.S. government. And there is no government document of any kind that I've ever heard of that gives the SIT obligations secondary status to regular marketable Treasury securities. This being so, the SIT obligations are just as valuable as regular marketable Treasury securities.
The counter-argument is that the marketable securities have been and are sold and resold in the marketplace, so there is no question what their value is, at least currently. (Granted, a change in perceptions of the U.S. government's credit rating, and changes in financial market interest rates impact the prices of U.S. marketable securities). Whereas the SIT obligations are internal government IOUs. Some have called them "mere accounting entries" and even "accounting fictions".
Also, as explained in SSA's actuarial Note 142, there is no date certain when these bonds are redeemed.
Also, the laws governing Social Security benefits (and thus the trust fund accounts) have been changed a number of times, such as raising the eligibility age for full retirement benefits, and by taxing some of the benefits.
See section non202 for a list of some benefits that have been cut in the past. That section deals with the myth that it is politically impossible to cut benefits.
Section non201 lists some accounting changes that have been made to stretch the life of the trust funds, or in other ways make the situation look better than it is. One example is shifting home health care costs from Medicare Part A (HI) to Part B (SMI). This cost - shifting prolongs the life of the HI trust fund. (Part B does not involve a trust fund, rather Part B costs are paid approximately 75% out of general tax revenues and 25% by monthly Medicare premiums.)
The laws governing the marketable securities have never been changed in a way that adversely affected existing security holders, as far as I know. And, as far as I know, the government has always paid interest when due, and principal upon maturity (and each marketable bill, note, and bond has a definite maturity date). And that is the reason why these bonds are marketable
Personally, I don't think the SIT obligations are as trustworthy as regular marketable Treasury securities. Yes, both are guaranteed by the full faith and credit of the U.S. government. But if it comes down to crunch time in 20 or 40 years -- such that there is a tax revolt at the polls by the working-age generation -- then I predict that it will be much easier to default on the SIT obligations (which are just promises to the elderly) than on the marketable securities sold to investors.
Should the U.S. government default on the marketable securities, or pass some laws that scale back on the interest, or change the maturity dates, that would relegate the U.S. to a fourth world nation, damage its financial credibility, and so on. The U.S. government would not be able to finance new debt, or roll over old debt (as it must constantly do), except at much higher interest rates. In particular, remember that foreigners hold about $1.2 Trillion in Treasury securities (which is 33 % of the publicly held debt) -- see section non163. So the issue of marketable securities is more than just a deal between the government and its citizens. It's a deal between the government and investors throughout the world. "It's a lot more serious than some politicians' promises", one has argued, referring to the trust funds' obligations.
Defaulting on some of the promises to the elderly, particulary those who are well-off, would not have great consequences in the world financial markets. Nor would there be overall adverse consequences politically either -- if the scaling back of benefits is brought about by working age people at the polls protesting huge payroll taxes. (See section non30 where the cost of SS and Medicare is predicted to reach a whopping 29% of payroll taxes in the year 2040). In fact, in a crunch situation, the world financial markets may well revalue the U.S. government's marketable securities upwards if the U.S. government scales back its promises to future SS beneficiaries.
(hits since Sept. 16, 1999)
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