• Tag Archives deficit
  • Entitlement Liabilities Are a Graver Threat to the Next Generation of Americans Than Climate Change


    On January 31, 1940, Miss Ida Fuller received a check for $22.54. She was the first person to retire under the Old-Age, Survivors, and Disability Insurance (OASDI) scheme, better known as Social Security. At the time of her retirement in 1939, she had paid just $22 in Social Security taxes. Ms. Fuller lived to be 100, cashing over $20,000 worth of Social Security checks.

    If she had only paid $22.54 in contributions, where did the $20,000 Ms. Fuller received in Social Security payouts come from? It came, as it does now, from the taxpayers of the day. As of 2019, your employer deducts 6.2 percent of your wages up to $132,900 a year, matches this amount, and sends it to the Social Security Administration (SSA). The SSA deposits this with the Treasury, which spends it and receives Treasury bonds in return. This is the fabled trust fund that guarantees Social Security.

    But these Treasury bonds are simply IOUs redeemable against the income of tomorrow’s taxpayers. When one of the Treasury bonds held by the SSA falls due for payment, the Treasury can only get the funds to meet this liability by taxing, borrowing (taxing the taxpayers of tomorrow), or printing money (imposing an inflation tax). In each case, what really guarantees Social Security is not the money you paid in but the earnings of today’s or tomorrow’s taxpayers.

    Such a pay-as-you-go scheme could chug along well enough as long as there were lots of workers relative to retirees. When the program began, every 100 workers were supporting three retirees.

    This favorable ratio encouraged politicians to be more generous. Originally intended to cover only about 50 percent of all workers, Social Security was expanded even before Ida Fuller received her first check to provide benefits for dependents of retired workers and surviving dependents. In the post-war years, Social Security grew further. Disability benefits, payable as early as age 50, were added in 1956, and during the 1950s coverage was extended to other previously excluded workers, making it essentially universal. Congress passed across-the-board benefit increases of 7 percent (1965), 13 percent (1967), 15 percent (1969), 10 percent (1971), 20 percent (1972), and 11 percent (1974). In 1972, benefits were tied to the Consumer Price Index, yielding an annual “cost of living adjustment.”

    In 1965, Medicare was signed into law, establishing a heavily subsidized federal health care program for the elderly. Former President Harry Truman and his wife received the first Medicare cards without paying a cent in Medicare taxes.

    Like Social Security, Medicare is financed by a payroll tax of 2.9 percent split between employer and employee, up from 0.7 percent in 1966. Like Social Security, that money gets paid right out to meet current expenses, which were vastly expanded by passage of Medicare Part D in 2003. And like Social Security, such a pay-as-you-go scheme could chug along well enough as long as there were lots of workers relative to retirees.

    Two things derailed that. US birth rates fell from births 3.65 births per woman in 1965 to 1.80 in 2016, and life expectancy rose from 68 in 1950 to 79 today. Together, this meant ever more retirees relative to the workers supporting them. By 2017, 100 workers were supporting 25 retirees.

    These shifting demographics have shredded the solvency of the “trust funds.” Social Security is estimated to run out of reserves in 2034, after which benefits would have to be reduced by about 25 percent to keep spending within available annual revenue. Over 75 years, Social Security has an unfunded liability of $13.9 trillion.

    The Medicare hospital insurance trust fund will run out of reserves in 2026. Medicare’s second trust fund, for physician and outpatient services and for prescription drugs, is permanently “solvent” because it has an unlimited call on the general fund of the Treasury—the incomes of future taxpayers. Premiums paid by the beneficiaries will cover only about 25 percent of program costs; the rest of the spending is unfinanced. Medicare’s overall unfunded liability over 75 years is more than $37 trillion.

    The taxes levied to fund Social Security have already risen drastically. In 1937, the Social Security tax rate was one percent on earnings up to $3,000 ($53,449 in 2019 dollars) to be matched by the employer. By 1971 it was 4.6 percent on earnings up to $7,800 ($49,411 in 2019 dollars). It now stands at 6.2 percent up to $132,900.

    This is only going to get worse. According to Census Bureau projections, by 2030 each 100 working-age Americans will be supporting 35 retirees, and this could rise to 42 by 2060. Another way to think of this is to calculate the number of retirees each worker must support. In 1946, the burden of one retiree was shared between 42 workers. Today, according to the SSA, roughly three workers cover each retiree’s Social Security and Medicare benefits. By 2030, however, there will be only two workers supporting each retiree.

    In other words, a working couple will have to support not only themselves and their family but also someone outside the family thanks to Social Security and Medicare.

    To make Social Security solvent again, the payroll tax rate would need to be hiked immediately from 12.4 percent to 15.2 percent, or Social Security benefits would need to be cut on a permanent basis by about 17 percent. According to economists Roger LeRoy Miller, Daniel K. Benjamin, and Douglass C. North:

    [F]or Social Security and Medicare to stay as they are, the payroll tax rate may have to rise to 25 percent of wages over the next decade. And a payroll tax rate of 40 percent is not unlikely by the middle of the twenty-first century.

    Teenage climate activist Greta Thunberg recently made international headlines with an impassioned speech to the United Nations in which she complained that her future had been stolen by inaction on climate change. An American Ms. Thunberg’s age could say the same about entitlement spending on Social Security and Medicare.

    By the expanding eligibility for and hiking the benefits of a pay-as-you-go system while at the same time having fewer children to fund it, the generations preceding that child have left a fearsome financial obligation. Either taxes will go up sharply for the workers of tomorrow, lowering their standard of living, or benefits will go down for the retirees of tomorrow, lowering their standard of living. One group is going to feel pretty angry.

    These problems were foreseen even as politicians were hiking payouts. In 1978, the economist Paul Samuelson wrote:

    [O]ur Social Security system is also an actuarially unfunded system…there is no obligation for this generation to have children at the same rate as did previous generations. Therefore, when those born during the baby-boom period of the ‘50s reach retirement age in the next century, their stipends will be felt as more of a burden by the thinner ranks of the then working population

    We are on the brink of inter-generational strife. We have the political shortsightedness of decades past to thank for that.


    John Phelan

    John Phelan is an economist at the Center of the American Experiment and fellow of The Cobden Centre.

    This article was originally published on FEE.org. Read the original article.


  • 18 Facts on the US National Debt That Are Almost Too Hard to Believe


    At around $22.5 trillion, the United States national debt sits at 106 percent of Gross Domestic Product (GDP). There is no disputing that this gigantic debt will someday become due and payable. However, there is hesitation among the political class as to what must be done to pay down and eliminate this debt.

    Progressive lawmakers have largely refrained from discussing this liability, preferring to claim that the United States can continue to fund exorbitant government programs. Conservatives have unsuccessfully, on numerous occasions, attempted to limit federal outlays. With each failed attempt, conservatives instead continue to vote for spending increases. At the National Review, Michael Tanner writes,

    there is no effort to prioritize or make the difficult choices of governing, there is only…more.

    Each attempt to cut or reduce the growth of federal spending has been met with resistance and ferocious outrage.

    If there is any takeaway from these unsuccessful attempts to reduce spending, it is that federal spending has subsidized numerous projects or programs, which have grown dependent on the federal government. There may be many good uses of federal funds, but this does not provide lawmakers with a “Get-out-of-jail-free card.” For now, lawmakers continue to spend as if they are children in a candy store with no limit on their parents’ credit card. At some point, lawmakers must address the underlying problem: federal spending.

    Lawmakers are representatives for their constituents. This goes without saying, but lawmakers are unlikely to address the ever-increasing national debt until voters demand action. What remains unfathomable to many voters is how much money $22.5 trillion truly is. As Jon Miltimore has written, “the problem is that the human mind has trouble understanding a figure so huge.” Below are some facts that help put into perspective just how large is the sum of $22.5 trillion:

    1. In order to pay down our national debt you would have to combine the GDP of China, Japan, and India.
    2. The United States owes $68,400 per citizen.
    3. The United States owes $183,000 per taxpayer.
    4. The United States currently has $125 trillion (yes, trillion) in unfunded liabilities.
    5. According to the nonpartisan Congressional Budget Office (CBO), the US debt held by the public will reach 100 percent of GDP in 2028.
    6. In 2008, interest on the federal debt was $253 billion. Interest for Fiscal Year (FY) 2019 is roughly 89 percent higher.
    7. For FY 2019, interest alone on the federal debt is $479 billion. In 1979, total federal government receipts were $463 billion.
    8. In the year 2000, the federal debt was $5.67 trillion. In 2019, federal debt is 297 percent higher.
    9. At Forbes, Jim Powell writes that the old New Deal cost about $50 billion from 1933 to 1940, whereas the “future cost of old New Deal programs still in effect is reckoned at more than $50 trillion.”
    10. A recent analysis by the CBO projected that the federal budget deficit (deficit as in the difference between federal outlays and revenues) will grow to $1 trillion alone in 2020.
    11. As of December 2018, only ten countries have worse Debt-to-GDP ratios than the United States.
    12. At NPR, Danielle Kurtzleben writes that Senator Bernie Sanders’ “taxation-and-spending plans…would together add $18 trillion to the national debt over a decade.”
    13. According to the Center on Budget and Policy Priorities, roughly 24 percent of federal spending goes to Social Security, 26 percent to federal health insurance programs, 9 percent to safety net programs, and only 2 percent on transportation infrastructure.
    14. By 2025, the cost of servicing our national debt will exceed the cost of our military spending.
    15. The cost of implementing a Universal Basic Income, presidential candidate Andrew Yang’s central social program proposal, would cost $3.8 trillion per year or roughly 85 percent of current federal spending.
    16. It would take the United States 713,470 years to pay down the national debt if we paid $1 per second of the year.
    17. Modern presidents have doubled the national debt every nine years.
    18. The Federal Reserve “purchased large amounts of federal debt as part of its quantitative easing program,” thus cheapening the cost (decreasing the interest rates) of money.

    Lawmakers and political pundits continue to insist that federal revenues are the real issue despite continuous growth in federal revenues. Heated rhetoric over federal tax cuts ignores the reality that federal spending increases continue to outpace federal revenue increases.

    At some point, purchasers of US treasury securities may request a higher return, materializing in higher interest rates, unless lawmakers address our growing national debt. For now, it is up to voters to demand that lawmakers implement responsible policies that protect our nation’s financial security.


    Mitchell Nemeth

    Mitchell Nemeth holds a Master in the Study of Law from the University of Georgia School of Law. His work has been featured at The Arch Conservative, Merion West, and The Red & Black. Mitchell founded the Young Americans for Liberty chapter at the University of Georgia.

    This article was originally published on FEE.org. Read the original article.