2004 November 18 Thursday
US Debt Limit Raised To $8.2 Trillion

This is a huge number.

The mostly party line, 52-44 vote was expected to be followed by House passage Thursday. Enactment would raise the government's borrowing limit to $8.18 trillion - $2.23 trillion higher than when Bush became president in 2001, and more than eight times the debt President Reagan faced when he took office in 1981.

...

Democrats complained that the bill - which will let non-defense, non-domestic security programs grow by about 2 percent next year - was too stingy. They said that clean water grants, the National Science Foundation and federal subsidies for hiring local police officers were all being cut from last year and that funds for education, biomedical research and veterans health care were inadequate.

Local governments can afford to hire their own police officers. Though I would like to see more science funding since I think the money will be paid back by the economic benefits we will get from biomedical advances that will eventually lower the cost of health care while simultaneously allowing people to work longer and therefore to pay more in taxes before becoming financial liabilities.

With an eleven trillion dollar a year economy federal debt is now over two thirds of a year's production.

The federal government hit the $7.384 trillion debt limit on Oct. 14, forcing the Treasury Department to begin taking extraordinary actions to avoid breaching the limit.

But America's financial problem is far larger. The current debt and deficit are nothing compared to the unfunded old age entitlements liabilities.

WASHINGTON - (KRT) - Comptroller General David Walker's most troubling briefing paper shows the federal budget growing progressively larger until spending reaches nearly half the economy's total output in 2040.

...

According to Walker, who heads the Government Accountability Office, the fiscal time bomb awaiting the United States could mean that taxes would have to be raised 250 percent, government programs would have to be sharply curtailed, and the U.S. would turn into a Third World country with enormous debt. If nothing is done, he said, the U.S. economy would be at risk - and in hock to the rest of the world. Interest on the debt alone would total nearly half of all federal spending in 2040. Liberal and conservative economists alike say the United States must address its long-term spending and deficit problems, and that would mean reducing Social Security and Medicare benefits along with raising taxes - all unpopular proposals.

One reason that I'm pessimistic about the prospects of our political system addressing the problem of unfunded old age retirement liabilities is that a lot of Democrats are in denial about the old age retirement entitlements programs. There are some exceptions among the Democrats to that denial, including some smart Democrat economists. But among the politicians and their more ideological supporters the denial is a lot more extensive. For example, The Century Foundation, a liberal democrat thinktank, has just published a report by Bernard Wasow that sees the complaints about Social Security's financial unsoundess as part of a Republican plot to cut back on the size of government. The report is entitled Reality Check: Scare Tactics: Why Social Security Is Not in Crisis. (reminding me of the Supertramp album Crisis? What Crisis?)

Opponents of Social Security have been striving to convince American workers, especially young adults, that Social Security will no longer exist by the time they retire. Phrases such as "imminent crisis" and "unmanageable costs" lace this rhetoric. To a large extent, this alarmism is voiced by those who are hostile to government and therefore favor replacing all or part of one of this nationís most successful and essential programs with private investment accounts. Bernard Wasow demonstrates why the "crisis" in Social Security is actually quite manageable.

Wasow sees Social Security as stronger than ever. (PDF format)

Social Security is stronger today than it has been at any time in its history.The program had a major boost in 1983,when policies were implemented that had been recommended by a commission appointed by President Ronald Reagan and headed by Alan Greenspan.As result,since 1983,the Social Security trust fund reserves have risen from essentially zero to more than $1.6 trillion.

Wasow ignores that the "Trust Fund" is just money that the federal government has already spent on other things. There is no bank account with a huge balance or a pot of gold worth $1.6 trillion dollars. The federal government will have to raise taxes or cut spending or borrow money from the public to get the $1.6 trillion to pay back the Social Security program the money that it borrowed from Social Security.

Making this picture far worse is Medicare. Medicare's expenses will grow more rapidly and its unfunded liabilities are far larger. So the federal government will not only need to come up with the money to pay back Social Security.

We are in a position where the Democrats are going to demagogue Republican attempts to address the old age retirement funding crisis before the crisis becomes acute. It is just too easy to deny the scale of the problem and label more responsible politicians as cruel, heartless, mean, and selfish and get enough oldsters worked up to vote against anyone who tries to act like a grown-up. Optimistic assumptions about economic growth rates, labor market participation rates, and other factors can be made by the defenders of the status quo direction of the Titanic. Iceberg? That's just moonlight reflecting off the water.

The costs in taxes and benefits cuts are far more immediate than the benefits of addressing the problem now. The benefits flow mostly to younger people and the longer the reforms are put off the more the benefits can flow to the older people. I just do not see the political system coming to grips with the problem and taking the steps necessary to solve it. The economic-demographic perfect storm looks like it will continue to build in strength. Sure hope I'm wrong...

For more on this problem see my previous posts Retirement Of Baby Boomers To Bring Enormous Fiscal Crisis and On The Medicare And Social Security Unfunded Liabilities and Social Security And Medicare Headed For Bankruptcy Sooner and Robert J. Samuelson On The Coming Federal Spending Expansion.

Share |      By Randall Parker at 2004 November 18 03:03 PM  Economics Demographic


Comments
Kurt said at November 18, 2004 6:25 PM:

There is no "trust fund" and there never has been. The myth of a social security "trust fund" is trotted out everytime by politicians who do not want to deal with the reality that has been created over the past 60 years.

Social security is simply a racket where young people pay taxes to support the old. It is simply a direct transfer of money. This kind of ponzei scheme works as long as you have a high birth rate and the young radically outnumber the old. Since the number of young people has declined, relative to the old, the system starts to breakdown, just like any other ponzei scheme.

Either the Century Institute is deluded enough to believe in the existance of such a "trust fund" (indicating that they do not understand the system very well) or they do understand what the social security system is and are lying through their teeth. Either explanation does not bode well for either the intelligence or the integrity of the liberals.

Despite my disgust with Bush and his administration, I voted for him for the simple reason that the liberals, if anything, are even more unhinged from reality than the current administration.

This problem is really not as bad as made out here. The federal government has trillions of dollars in assets, including something like 85% of the land area of states like Arizona and Nevada. The feds will simply be forced to selloff huge amounts of these assets in the 2015-2040 period, which is no bad thing at all. the boomer retirement fiscal crises will likely result in the evisceration of the federal government by 2040. If a half to two-thirds of federal government spending is going into entitlements, it is likely that the rest of the functions of the federal government will end up being block-granted to the states, in order to get the federal government free of responsibility for anything other than entitlements.

by 2040 we should have immortality (along with a much reduced federal government), which will obsolete the need for programs like social security and medicare anyways.

Patrick said at November 19, 2004 12:17 AM:

I've always thought that the basic problem is that the USA presents old age pensions as an insurance scheme. Here in Australia we called it what it was, a pension. The oldies get a pension paid for by taxes. This makes it much, much easier to introduce ideas like
1. An income test, so only old people without income get the pension.
2. An asset test, so they can't have 5 million in real estate or 0% savings accounts and still claim the pension
3. A supplementary privitisation of the whole pension scheme.

Change the name first, and then you can introduce reform.

Proborders said at November 19, 2004 4:40 PM:

1. Social Security benefits could be fully subject to federal income taxation. If Social Security benefits were fully subject to federal taxation, billions of dollars in additional tax revenues could probably be collected.

2. Medicare could be restricted to people who aren't millionaires.

3. Limit the Medicare prescription benefit to non-millionaires.

4. Keep the estate tax.

5. Consider means testing Social Security benefits. Multi-millionaire seniors have plenty of assets. It is better to means test Social security benefits by not paying Social Security benefits to millionaire seniors rather than to terminate the program for younger workers (see Patrick's #2 above).

6. Take in fewer immigrants with limited amounts of formal education.

7. Don't spend money foolishly on costly, unnecessary military "adventures."

noone said at November 20, 2004 5:39 AM:

"Keep the estate tax."

This merely destroy's small buisness and familiy farms.I once infuriated a lefty freind by pointing out that the death tax forces farm families to sell the land at bargain prices,to either real esate developrs or agri-corporations.Talk about corporate welfare.

Proborders said at November 20, 2004 10:29 AM:

The federal estate tax system should be reformed. However, the federal estate tax should not be phased out.

Other Possibilities:

8. Raise the top federal marginal tax rate

9. Raise the top tax rate on taxable dividends

10. Raise the top federal capital gains tax rate

11. With some possible exceptions deport all illegal aliens ASAP.

12. Make it more difficult for illegal aliens to cross the border from Mexico to the USA.

Larry Sharratt said at January 6, 2005 8:35 AM:

Step 1: Take Social Security "off line", i.e. out of the general fund and account for the revenues and expenditures separately. It would then be immediately apparent that there is no immediate crisis in social security, the crisis is with other government spending that has raided (stolen) social security revenues for other purposes. The fact that government will have a very difficult time paying the $$ back when the time comes shouldn't be a social security problem, it should be a general rev/exp problem and paid for with tax revenue other than social security taxes.


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