The U.S. government has made the promise of social security and medicare to its citizens. So, what is a promise? It’s “an express assurance on which expectation is based.”
One party offers an assurance, which the other converts into an expectation. You deposit money in your checking account, and the bank assures you that you can have it back on demand. You expect that the bank will fulfill its promise when you visit an ATM.
Governments likewise make promises, but those are different. Government is the ultimate enforcer of promises, but we have no recourse if it breaks them; except at the ballot box. As we’ve seen in recent months regarding public pensions, that’s ineffective. Promises made long ago by officials who are no longer in office are hard to enforce.
The federal government keeping its promises is important for everyone in the US. Almost all of us are part of the largest public pension system, Social Security. We pay taxes our whole working lives and expect the government to give us retirement benefits. But what happens if it can’t?
Social Security and Medicare
Let’s take a hard look at the unfunded liabilities and debt of the US government. In the United States we have two national programs to care for the elderly. Social Security provides a small pension, and Medicare covers medical expenses. All workers pay taxes that supposedly fund the benefits we may someday receive. But is that actually true?
Neither, Social Security or Medicare is an all-encompassing benefit. Living on Social Security benefits alone would be a pretty meager existence. Medicare has deductibles and copayments that can add up quickly. Both programs assume people have their own savings and other resources. Nevertheless, the programs are crucial to millions of retirees.
Social Security and Medicare have one primary benefit; they’re guaranteed. Uncle Sam will always pay them – he promised. And to his credit, Uncle Sam is trying hard to keep his end of the deal. In fact, he’s running up debt to do so. Actually, a massive amount of debt: Federal debt as a percentage of GDP has almost doubled since the turn of the century. The big jump occurred during the 2007–2009 recession, but the debt has kept growing since then. That’s a consequence of both higher spending and lower GDP growth.
In theory, Social Security and Medicare don’t count here. Their funding goes into separate trust funds. But in reality, the Treasury borrows from the trust funds, so they simply hold more government debt.
Here is the harsh reality of the numbers:
- Debt held by the public: $14.4 trillion
- Intragovernmental holdings (the trust funds): $5.4 trillion
- Total US National debt: $20.368 trillion
Total GDP is roughly $19.3 trillion today. This means the federal debt is about equal to one full year of the entire nation’s collective economic output. In reality, it’s even more when you consider that GDP counts government spending as “production”. This is even true when Government spends borrowed money. Of course, that total doesn’t count the $3 trillion-plus of state and local debt. Including state and local debt in US figures would take our debt-to-GDP above 115%.
U.S. Financial Report
The government doesn’t need to make a profit and it actually earns nothing on its own. However, we expect it to spend our tax money wisely and to deliver services efficiently. Each year the Treasury has to issue what I will call an annual financial statement. Just as a corporation would the government is supposed to fully disclose their “ROI”. This is called simply The Financial Report of the United States Government. (https://www.fiscal.treasury.gov/fsreports/rpt/finrep/fr/16frusg/01112017FR_(Final).pdf)
You may want to look at pages such as page 63 which tells us the present value of the future liability of the Government for Social Security and for Medicare. Unless I can’t read the amounts exceeds revenues by about 46 Trillion dollars. So, if we, as a country, are earning around $19 Trillion now, then the math just doesn’t add up well. This is what you see as defined on: USDebtClock.org -as “unfunded Liabilities”. To make this sound worse, many tell you this number is much higher. Bottom line is congress that will have to wrestle with trying to solve this line item in the future.
According to John Mauldin in his Mauldin Economics blog, “ It would take an immediate and permanent 59 percent increase in all federal taxes or an immediate and permanent 33 cut in all federal expenditures (including official debt service) to eliminate our fiscal gap. The longer we wait to fix our fiscal system, the larger the adjustment needs to be.”
If we use the CBO’s own numbers, the projected total US debt will be $30 trillion within 10 years. However, the CBO also assumes there no recessions and that GDP will grow at a 4% nominal rate. In my opinion that may be a little too optimistic. So, looking at the CBO’s 2016 10 year forward forecast, I would wager that 2027 under-funded liability will be north of $35 trillion. If a corporation ran their books like the government did…
If we look at the demographic reality of the baby boomers, longer lifespans and lower birthrates, it’s hard to believe Social Security can survive over the long run in anything like its present form. But any major change will mean that the government is breaking its promise to workers and retirees. Many Americans think of “their” Social Security like a business contract, similar to insurance benefits or personal property. The fact is, the FICA deduction in your paycheck stands for Federal Insurance Contributions Act. You paid money into the system all those years, so you should get it back along with any interest. Is this the truth?
In 1960, a Supreme Court case; Flemming vs Nestor ruled that Social security is not insurance or any other kind of property. We are obligated to make FICA contributions. However, the government isn’t obligated to give your money back. FICA is a tax then, although the amount you pay in does figure into a benefit for you but, if Congress changes that benefit then is it not simply a tax?
Under current law Social Security benefits are guaranteed, but Congress can reserve the rights to change those benefits by changing the law. So, the only way to have any control is when you vote. So, are Social security benefits a right? For that matter is Medicare health insurance a right? Or, as I am arguing are these benefits solely at the discretion of our legislators?
What I am trying to convey is a very large number of “baby boomers” is relying heavily on Washington’s promise for much of their future health and income insurance. What if they can’t or won’t fulfill that promise? Does this mean our taxes will be substantially higher than they are today? I think so. In addition, this may be coupled with a reduction in benefits available to retirees. If you look at history as our guide, you see historical tax rates have been much higher than over the last 30 or so years. For example, look at historical tax rates in 1960-1963. If today’s tax rates were at that level, most of us would regret having put money into pre-tax retirement accounts. In that scenario, access to your retirement savings would cost heavily. Something not been factored into most of our retirement income plans.
Regardless, your future “Government Pension” is most likely an unfunded liability so a promise to pay from the Government. So, do you think politicians are going to belly up and increase the tax rates? Or, will they do things such as means testing or raising the retirement age to postpone the inevitable of tax rate hikes? Just trying to evoke a bit of research on your part to see if you believe that things are going to change in the future from the status quo. Think it over, do a little reading and develop your own assumptions.