US "Entitlement" programs - Impact on debt
In a previous post, I looked at the U.S. Federal debt. In this one, I look at "unfunded" liabilities for "entitlements". Some people unfunded liabilities for entitlements by assuming an "infinite time horizon" ; such estimates are over $50 trillion. The trustees themselves use a 75-year horizon, and come up with lower numbers, which are still mind-boggling: around $19 T.
This chart from my previous post shows that the U.S. Federal debt is $10 trillion, if one excludes the $4.5 T officially owed to "Trust Funds". So, the $19 T (the 75 year estimate) is twice what the U.S. government owes on everything else.
Trust-funds are an obscuring fiction: Readers here know that the "entitlement trust funds" are an accounting fiction. About 30% of the costs of entitlement programs are already funded from general funds, not from the payroll tax (roughly 10% is "interest" the government pays on the "trust funds" and about 20% is money paid toward "Supplementary medical Insurance", for which no payroll tax is taken.)
Think outflows: It's best not to treat entitlements as if they're separate from other Federal Government expenditures: in other words, the point at which social security starts to "draw down" its "trust fund", or the point at which the trust fund goes to zero are pretty irrelevant dates. Think flow: the impact of entitlements is the increasing annual spending planned by the government.
Outflow -- an increasing Annual Drain: According to the trustees, outflows for entitlements will grow from $1.3 T today to $2.2 T in 2020. If payroll taxes do not change at all, this will add up to an additional expenditure of about $3.7 T over that period of 9 years. Payroll taxes will rise somewhat with GDP. If we assume 4-5% GDP growth a year, we would offset more than half the rise in expenses. On the other hand, medical expenses grow faster than GDP, and this means every year the gap gets worse. To pull an approximation out of a hat (a quick spreadsheet I threw together), I think we would add about $6 T in total government expenditures over the next 12 years (three presidential terms). The chart on the left shows the growth of the debt on account of entitlements, for different time horizons.
Sensitivity analysis: If benefits are cut to (say) 80% of what they are today, we're still looking at $4 or $5 T over 12 years. Similarly, raising payroll taxes (or income taxes) by 1% of wages probably bring the number down to under $4-$5 T. For comparison, letting the "Bush tax cuts" expire would raise taxes by about $1 - $2 trillion over a decade.
SSA Estimates: Using a 75 year horizon, the trustees of the SSA estimate that raising the payroll tax by a little over 3% of payroll: i.e. from 15.3% to about 18.5% of wages will cover the next 75 years. [P.S. right now, the rate is temporarily around 13.3%, because of the "payroll tax cut"]. Estimates like these must make assumptions about future rates of economic growth. If we see a few decades of slower growth combined with historically higher unemployment (thus less payroll taxes), the actual damage will be higher. To make matters worse, the baby boomers are just starting to retire and this means the major growth in outflows comes in the next 30 years. In other words, the 3% works by making up for the next few decades during the decades that follow: which is typical political "front-loading" of spending and "back-loading" of taxes.
Not enough worry: Entitlement programs are a Ponzi scheme, not designed to pay what's promised. Ponzi schemes can last for a while. How long before things get serious enough that there is widespread voter-agreement that something must be done? When Rick Perry called Social Security a Ponzi scheme Romney criticized him. So, the GOP -- posturing as more fiscally sound than the Democrats -- are unwilling to be honest about entitlements. This tells me that -- for all the noise about social security not being around for the kids -- voters are not yet ready to address entitlements seriously: they're still in "extend and pretend" mode. Anyhow, this post is mainly to document the extent of the problem, not to make predictions.
And there's more: In addition to federal debt documented in an earlier post, and entitlement debt documented in this one, the U.S. also has some other unfunded liabilities: for instance the guarantees that it has given to Freddie and Fannie, on which it may have to make good. Those will need a separate post.
Summary: The total U.S. Federal debt is $10 T, but in the next 12 years we will have to incur about $6 T more just on entitlements, even if we get all other expenditures under control. Our GDP is about $15 T. So, we're going to owe about 100% of GDP pretty soon (we already do if we think of entitlements as a "debt to ourselves", but in 12 years we will owe it in the form of actual issued government bonds -- which does make a difference).
Also see: This Thrutch post that shows Unfunded liabilities for different countries.
Economist James Hamilton estimates "off balance sheet liabilities" of the U.S. Federal government to be over $60 Trillion (2012), but some of these are maximum-possible commitments.
This chart from my previous post shows that the U.S. Federal debt is $10 trillion, if one excludes the $4.5 T officially owed to "Trust Funds". So, the $19 T (the 75 year estimate) is twice what the U.S. government owes on everything else.Trust-funds are an obscuring fiction: Readers here know that the "entitlement trust funds" are an accounting fiction. About 30% of the costs of entitlement programs are already funded from general funds, not from the payroll tax (roughly 10% is "interest" the government pays on the "trust funds" and about 20% is money paid toward "Supplementary medical Insurance", for which no payroll tax is taken.)
Think outflows: It's best not to treat entitlements as if they're separate from other Federal Government expenditures: in other words, the point at which social security starts to "draw down" its "trust fund", or the point at which the trust fund goes to zero are pretty irrelevant dates. Think flow: the impact of entitlements is the increasing annual spending planned by the government.
Sensitivity analysis: If benefits are cut to (say) 80% of what they are today, we're still looking at $4 or $5 T over 12 years. Similarly, raising payroll taxes (or income taxes) by 1% of wages probably bring the number down to under $4-$5 T. For comparison, letting the "Bush tax cuts" expire would raise taxes by about $1 - $2 trillion over a decade.
SSA Estimates: Using a 75 year horizon, the trustees of the SSA estimate that raising the payroll tax by a little over 3% of payroll: i.e. from 15.3% to about 18.5% of wages will cover the next 75 years. [P.S. right now, the rate is temporarily around 13.3%, because of the "payroll tax cut"]. Estimates like these must make assumptions about future rates of economic growth. If we see a few decades of slower growth combined with historically higher unemployment (thus less payroll taxes), the actual damage will be higher. To make matters worse, the baby boomers are just starting to retire and this means the major growth in outflows comes in the next 30 years. In other words, the 3% works by making up for the next few decades during the decades that follow: which is typical political "front-loading" of spending and "back-loading" of taxes.
Not enough worry: Entitlement programs are a Ponzi scheme, not designed to pay what's promised. Ponzi schemes can last for a while. How long before things get serious enough that there is widespread voter-agreement that something must be done? When Rick Perry called Social Security a Ponzi scheme Romney criticized him. So, the GOP -- posturing as more fiscally sound than the Democrats -- are unwilling to be honest about entitlements. This tells me that -- for all the noise about social security not being around for the kids -- voters are not yet ready to address entitlements seriously: they're still in "extend and pretend" mode. Anyhow, this post is mainly to document the extent of the problem, not to make predictions.
And there's more: In addition to federal debt documented in an earlier post, and entitlement debt documented in this one, the U.S. also has some other unfunded liabilities: for instance the guarantees that it has given to Freddie and Fannie, on which it may have to make good. Those will need a separate post.
Summary: The total U.S. Federal debt is $10 T, but in the next 12 years we will have to incur about $6 T more just on entitlements, even if we get all other expenditures under control. Our GDP is about $15 T. So, we're going to owe about 100% of GDP pretty soon (we already do if we think of entitlements as a "debt to ourselves", but in 12 years we will owe it in the form of actual issued government bonds -- which does make a difference).
Also see: This Thrutch post that shows Unfunded liabilities for different countries.
Economist James Hamilton estimates "off balance sheet liabilities" of the U.S. Federal government to be over $60 Trillion (2012), but some of these are maximum-possible commitments.
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