[Op-ed] The US is bankrupt

[J]

Bloomberg link

U.S. Is Bankrupt and We Don't Even Know: Laurence Kotlikoff
By Laurence Kotlikoff - Aug 10, 2010 9:00 PM ET
Bloomberg Opinion

Let’s get real. The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills.

What it can and must do is radically simplify its tax, health-care, retirement and financial systems, each of which is a complete mess. But this is the good news. It means they can each be redesigned to achieve their legitimate purposes at much lower cost and, in the process, revitalize the economy.

Last month, the International Monetary Fund released its annual review of U.S. economic policy. Its summary contained these bland words about U.S. fiscal policy: “Directors welcomed the authorities’ commitment to fiscal stabilization, but noted that a larger than budgeted adjustment would be required to stabilize debt-to-GDP.”

But delve deeper, and you will find that the IMF has effectively pronounced the U.S. bankrupt. Section 6 of the July 2010 Selected Issues Paper says: “The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.” It adds that “closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.”

The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years.

Double Our Taxes

To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act.

Such a tax hike would leave the U.S. running a surplus equal to 5 percent of GDP this year, rather than a 9 percent deficit. So the IMF is really saying the U.S. needs to run a huge surplus now and for many years to come to pay for the spending that is scheduled. It’s also saying the longer the country waits to make tough fiscal adjustments, the more painful they will be.

Is the IMF bonkers?

No. It has done its homework. So has the Congressional Budget Office whose Long-Term Budget Outlook, released in June, shows an even larger problem.

‘Unofficial’ Liabilities

Based on the CBO’s data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt. This gargantuan discrepancy between our “official” debt and our actual net indebtedness isn’t surprising. It reflects what economists call the labeling problem. Congress has been very careful over the years to label most of its liabilities “unofficial” to keep them off the books and far in the future.

For example, our Social Security FICA contributions are called taxes and our future Social Security benefits are called transfer payments. The government could equally well have labeled our contributions “loans” and called our future benefits “repayment of these loans less an old age tax,” with the old age tax making up for any difference between the benefits promised and principal plus interest on the contributions.

The fiscal gap isn’t affected by fiscal labeling. It’s the only theoretically correct measure of our long-run fiscal condition because it considers all spending, no matter how labeled, and incorporates long-term and short-term policy.

$4 Trillion Bill

How can the fiscal gap be so enormous?

Simple. We have 78 million baby boomers who, when fully retired, will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today’s dollars. Yes, our economy will be bigger in 20 years, but not big enough to handle this size load year after year.

This is what happens when you run a massive Ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old while promising the young their eventual turn at passing the generational buck.

Herb Stein, chairman of the Council of Economic Advisers under U.S. President Richard Nixon, coined an oft-repeated phrase: “Something that can’t go on, will stop.” True enough. Uncle Sam’s Ponzi scheme will stop. But it will stop too late.

And it will stop in a very nasty manner. The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills.

Worse Than Greece

Most likely we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices. This is an awful, downhill road to follow, but it’s the one we are on. And bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece.

Some doctrinaire Keynesian economists would say any stimulus over the next few years won’t affect our ability to deal with deficits in the long run.

This is wrong as a simple matter of arithmetic. The fiscal gap is the government’s credit-card bill and each year’s 14 percent of GDP is the interest on that bill. If it doesn’t pay this year’s interest, it will be added to the balance.

Demand-siders say forgoing this year’s 14 percent fiscal tightening, and spending even more, will pay for itself, in present value, by expanding the economy and tax revenue.

My reaction? Get real, or go hang out with equally deluded supply-siders. Our country is broke and can no longer afford no- pain, all-gain “solutions.”

(Laurence J. Kotlikoff is a professor of economics at Boston University and author of “Jimmy Stewart Is Dead: Ending the World’s Ongoing Financial Plague with Limited Purpose Banking.” The opinions expressed are his own.)

Of particular interest is page 68 of the CBO report which is linked in the original article on Bloomberg. Under the alternative scenario which I believe is the more realistic one, Social Security and Medicare spending alone will exceed ALL government revenues in around 30-35 years.

[MKSheppard]

What it can and must do is radically simplify its tax, health-care, retirement and financial systems, each of which is a complete mess. But this is the good news. It means they can each be redesigned to achieve their legitimate purposes at much lower cost and, in the process, revitalize the economy.

This. I mean for god's sake, the People's Republic of China manages to run all personal income taxes on the following tax code:

Individual Income Tax of the People's Republic of China

That's only four-five pages in Word. Meanwhile, the equivalent US tax code would be a fairly thick volume.

[Kanastrous]

I wonder if a clever lawyer could construct a case for the return of that effectively-stolen social security money that's been extracted from us over the last few decades - since it wasn't used for its declared purpose or in its intended way, isn't that some kind of litigable malfeasance?

Not that I believe for a moment such a suit would succeed, even if it had air-tight merit - doubtless it would be thrown out by the first Federal judge who sees it, even if it had merit, even assumning it could be brought. But it's interesting in an academic sort of way...

[Broomstick]

Am I the only one who doesn't find this to be news? Yes, we're bankrupt and the only way to fix it is to raise taxes and restructure some of our government programs. This isn't rocket science.

[Kanastrous]

I think the question is does anybody find this news?

[Alyrium Denryle]

Am I the only one who doesn't find this to be news? Yes, we're bankrupt and the only way to fix it is to raise taxes and restructure some of our government programs. This isn't rocket science.

That sad part is, that wont happen and if it does it will be written my multinational corporations. the medical industry etc by proxy. Why? Because unlike in Iceland or Belgiu, when our government fucked up this bad they don't resign and hold new elections. They desperately try to hold on to power.

[Jaevric]

Even if the government resigned en masse, would Americans elect a government that was willing to take the kind of steps that are necessary to fix things? Even if, by some chance, we voted a government into office that suddenly raised everyone's taxes and started the restructuring needed to solve the problem in the long run they'd be out of office at the next election cycle when people realized the new taxes meant they can't afford to upgrade from the iPhone 6 to the iPhone 7 and might have to drive a four-year-old car for a while longer.

Isn't there a famous quote about the disadvantage of democracy is that a nation gets the government it deserves?

[Kanastrous]

Democracy does not guarantee a people the government they need, but it guarantees them the government they deserve. Or something like that. By some smart person whose name I don't know.

Part of the problem is that by and large American voters don't want to hear about the things that can salvage the situation, much less actually do any of them, because of the grotesquely arrogant and overweening popular view of America's role, destiny, etc, etc, etc.

[Eleas]

I think the question is does anybody find this news?

That may be the question, but I think that's beside the point. The important thing is to see the words asked: to see them repeated again, and again, and again, publicly, until the reality they refer to can no longer be avoided or obfuscated by those in charge.

[Uraniun235]

So, what's the problem with SS/Medicare/Medicaid? Are we wasting too much money to get necessary benefits to these people? What's the proper course to take with social services?

I read "SS/medicare is a Ponzi scheme", without any suggestion for an alternative social welfare program, and I see some asshole sitting in a cushy office who thinks we should just kick people to the curb and let them starve in the street rather than tax people to provide for essential services.


EDIT: How far would single-payer healthcare go towards resolving this, considering that theoretically if implemented correctly, we could save literally hundreds of billions of dollars a year in eliminated 'administrative costs' alone?

[Kanastrous]

So, what's the problem with SS/Medicare/Medicaid?

Strictly from a layman's understanding: too many people collecting too much in benefits living for too long and requiring increasingly expensive care, while they're doing it. Too few people paying in too few dollars to make up the difference. And remember: social security was pimped as you putting in your $$$ into your account, and then collecting your $$$ back out again, when you retire. But it's not really operated that way, it's a Ponzi scheme: you are granted the honor of contributing your $$$ to be collected by present retirees, whose $$$ was collected by the people retiring before *them*, etc, etc, etc

Are we wasting too much money to get necessary benefits to these people? Is the article arguing that it is impossible to afford to support the old and infirm? What's the proper course to take with social services?

There's for-sure waste in the system, but even in some ideal waste-free arrangement the people collecting still overwhelm the people contributing.

I suppose that you could draw that conclusion from the article, or at least that it's impossible to continue much longer on the present course.

Proper course...? I'll wait and see what other minds here come up with by way of suggestions.

[Uraniun235]

Well I guess in that respect a big question becomes "what constitutes necessary services?" Do we need to make cash payments to retirees as in Social Security? Does everyone need to collect? What needs to happen to make sure people are not starving and freezing to death on the street? I'll accept that a $500/month check may not be the optimal solution, but I will not accept the notion that it is literally impossible for us as a society to support our old and our crippled people.

[Anguirus]

No, it's not news: it's an op-ed. I know we all here may be sick of it, but I seem to be seeing this more realistic attitude crop up a lot more in more mainstream sources. This is probably a good thing.

[Kanastrous]

Well I guess in that respect a big question becomes "what constitutes necessary services?" Do we need to make cash payments to retirees as in Social Security? Does everyone need to collect? What needs to happen to make sure people are not starving and freezing to death on the street? I'll accept that a $500/month check may not be the optimal solution, but I will not accept the notion that it is literally impossible for us as a society to support our old and our crippled people.

My understanding is that you can collect your SS payout regardless of your retirement income or assets - which frankly seems only fair since you were dinged for the contributions under the happy-happy promise that you'd eventually collect. Even so, if it were ruled that having a certain amount in the bank by a certain age, or having assets above a certain cutoff disqualified you from collecting, as a measure to keep the system staggering along I'd probably back it anyway.

Also, there's a cap on the contributions you make: up to a certain dollar count a proportionate contribution is made to social security - but beyond that, the remainder of the dollars you earn do *not* count towards calculating your contribution. I've heard it suggested that if we removed that cap on contributions - so that billionaire earners, for example, contribute based upon their full income rather than up-to-a-cutoff-point - the system would stabilize.

I sometimes think we should hand church and community groups retiree-care responsibilities, under strict state-enforced standards. Those groups are predominantly local and therefore hypothetically more responsive to local needs, they are constituted as community organizations to start with, and it's about time they began earning their tax exemptions by doing something of some actual utility to the nation.

[Gerald Tarrant]

Paul Ryan put forth a "roadmap" to balance the budget (at least as scored by the Treasury department). It includes unpleasant program cuts (including removing federal support for S-Chip) and tax cuts (supply siders ahoy). But it passed muster of the treasury department's fiscal models. Unfortunately the Democrats are still talking using platitudes like "cut waste and abuse", until they offer a concrete plan (with the huge tax-rates that requires)their budget bonafides are just not there. Ryan's unpalatable plan is the best we've got, unitl some Democrats get serious enough to offer concrete cuts and exact amounts for the tax rate increase. At that point, the best result would be harmonization of the final Republican and Democratic plans, unfortunately I don't think enough R's and D's take it seriously yet, which means when they finally do buckle down the cuts are going to have to be that much deeper.

[SirNitram]

American is bankrupt? That's shocking. The people buying the debt don't know this. Yesterday the value ticked up. I really, really suggest we don't let them know.

Further more, we get the usual 'SS is doomed', ignoring that we got a drop in the acturial deficit, and the 75 year projected deficit for all social security(Including the already-in-the-red SSD) is 1.94%.

And that's if you really beleive we can project the budget 75 years out.

Re: Paul Ryan: Check the CBO fine print on that. Or, to put it out in the open(I realize reading CBO reports is masochism for most), allow me to quote the relevent caveat.

The proposal would make significant changes to the tax system. However, as specified by your staff, for this analysis total federal tax revenues are assumed to equal those under CBO’s alternative fiscal scenario (which is one interpretation of what it would mean to continue current fiscal policy) until they reach 19 percent of gross domestic product (GDP) in 2030, and to remain at that share of GDP thereafter.

The roadmap relies on the assumption that all tax cuts included do NOT effect how much tax revenue you take in for two decades. Which is bullshit.

[MKSheppard]

The roadmap relies on the assumption that all tax cuts included do NOT effect how much tax revenue you take in for two decades. Which is bullshit.

Acutally, no -- it's probably closer to the truth than you think. US Government revenues since the "modern" era began with the end of the Korean War in 1952 have consistently stayed within the bracket of 15-20% of GDP; even as the top rate dropped from 92% to today's 35%.

Moving the rate from 2008's 17.48% to something resembling 2000's 20.35% via going back to Clinton era top taxation rates of 39.5% and hoping the economy booms won't bring in enough revenue to cover the huge hole that entitlement programs are going to be falling into in the next couple of decades. Doubling taxes up to near their 1970s levels won't bring in much money either, given that 1970s tax revenues amounted to 16-20% of GDP too.

So spending cuts are inevitable in entitlement programs to get things in line. It's just a matter of how bad things get before people bite the bullet and cut back on those. But there will be much screaming beforehand...

[D.Turtle]

Sorry, but there is too much bullshit in the article. I agree that the US situation is bad (because your taxes are too low), but still: citing unfunded liabilities of 200 Trillion Dollars...

Thats just blatant panic making. Those huge numbers are only achieved by looking at very long term plans. This means, that very small increases in taxes suddenly erase this huge "unfunded liability".

Lets take a look at the SUMMARY OF THE 2010 ANNUAL REPORTS Social Security and Medicare Boards of Trustees:

The projected 75-year actuarial deficit in the Hospital Insurance (HI) Trust Fund is 0.66 percent of taxable payroll, down substantially from 3.88 percent projected in last year’s report. The HI fund still fails the test of short-range financial adequacy, as projected annual assets drop below projected annual expenditures within 10 years — by 2012. The fund also continues to fail the long range test of close actuarial balance. The projected date of HI Trust Fund exhaustion is 2029, 12 years later than in last year’s report, at which time dedicated revenues would be sufficient to pay 85 percent of HI costs. The share of HI expenditures that can be financed with HI dedicated revenues is projected to decline slowly to 76 percent in 2045 and then to rise slowly, reaching 89 percent in 2084. Over 75 years, HI’s estimated actuarial imbalance is 23 percent as large as payroll taxes, and 16 percent as large as program outlays.

The annual cost of Social Security benefits represented 4.8 percent of GDP in 2009 and is projected to increase gradually to 6.1 percent of GDP in 2035 and then decline to about 5.9 percent of GDP by 2050 and remain at about that level. The projected 75-year actuarial deficit for the combined Old-Age and Survivors Insurance and Disability Insurance (OASI and DI) Trust Funds is 1.92 percent of taxable payroll, down from 2.00 percent projected in last year’s report.

Or in a picture:

Now, how much did this change the so-called unfunded liabilities?

Then there is the usual bullshit about the worker to beneficiary bullshit. Yes, baby-boomers will have an effect, this will be a small effect. And the development of the worker-to-beneficiary ratio was more or less known from the very moment the whole fucking system was started.

Quoting from two blog posts that quote from this book:

Related to issues about retirement age are questions about life expectancy. Many people are under the mistaken impression that Americans receive retirement benefits for considerably longer than they did when the program was created. The misconception results from looking at life expectancies from birth, which have changed dramatically because of the medical success achieved in conquering childhood diseases. But those numbers reflect changes in the numbers of those who survive to retirement, not what happens thereafter. The statistics regarding children distort the overall average ....

For Social Security purposes, the correct question is not how many live to age 65, but rather how long those reaching age 65 live thereafter. Here the numbers are not as dramatic. In 1940, men who survived to age 65 had a remaining life expectancy of 12.7 years. Today, a 65 year old man can expect to live not quite three years longer than he might have in 1940, or 15.3 years beyond reaching age 65. For women, the comparable numbers are 14.7 years beyond age 65 in 1940; 19.6 years in 1990.

"Sixteen workers paying in for every beneficiary" is a meaningless statistic that never affected policy in the slightest. The 16-to-1 ratio is a figure plucked from 1950, the year that Social Security expanded to cover millions of theretofore uncovered workers: farm workers, domestic workers, and others. Those 1950 amendments followed the recommendations of the 1948 advisory council ….

… all pension programs that require a period of employment for eligibility, private as well as public, show similar ratios at the start, because all newly covered workers are paying in, but no one in the newly covered group has yet qualified for benefits. The president could just as accurately have said that in 1945, the ratio of works to beneficiaries as 42 workers paying in for every one beneficiary or the equally accurate but misleading ratio from 1937, 26 million workers paying in for about a dozen beneficiaries.

… what is important is not the worker-to-beneficiary ratio at the start of the program but the ratio when the program reaches maturity. Consistent with the meaninglessness of the 16-to-1 factoid, the worker-to-beneficiary ratio was halved to eight workers for every beneficiary within five years, and by 1975, the ratio was where it is today. The 1994-1996 advisory council had not agreed on much, but it made one very valuable contribution. Its report included the appendix that stated that "the fundamental ratio of beneficiaries to workers was fully taken into account in the 1983 financing provisions, and, as a matter of fact, was known and taken into account well before that."

Again, the US has problems, however these aren't caused by Medicare/Medicaid/Social Security.

[Thanas]

The roadmap relies on the assumption that all tax cuts included do NOT effect how much tax revenue you take in for two decades. Which is bullshit.

Acutally, no -- it's probably closer to the truth than you think. US Government revenues since the "modern" era began with the end of the Korean War in 1952 have consistently stayed within the bracket of 15-20% of GDP; even as the top rate dropped from 92% to today's 35%.

Moving the rate from 2008's 17.48% to something resembling 2000's 20.35% via going back to Clinton era top taxation rates of 39.5% and hoping the economy booms won't bring in enough revenue to cover the huge hole that entitlement programs are going to be falling into in the next couple of decades. Doubling taxes up to near their 1970s levels won't bring in much money either, given that 1970s tax revenues amounted to 16-20% of GDP too.

So spending cuts are inevitable in entitlement programs to get things in line. It's just a matter of how bad things get before people bite the bullet and cut back on those. But there will be much screaming beforehand...

How much has the government percentage of GDP changed? I mean, it is one thing to collect 20% of GDP and be responsible for the same amoun of GDP spending. It is another to spend 30% and collect 20%.

[J]

I point you towards this table in the link you've provided, along with the Chart B immediately below it.



What does this imply about GDP if the percentages are what the graph claims?
IF these numbers are to square, it means real GDP must grow by 50-60% within the next 20 years. Good luck with that assumption.

[Surlethe]

(1) To the "Social Security is DOOMED" folks, check out: http://www.factcheck.org/article302.html

(2) J, you can get 50-60% growth in the next 20 years by growing between 2% and 3% annually: 1.02^20 = 1.5 and 1.03^20 = 1.8. That is, 2% annual growth gives 50% over 20 years and 3% annual growth gives 80% growth over the next 20 years.

[Kanastrous]

It's a January 2005 article. Is it all still applicable to going forward from where we're at right now?

[aerius]

(1) To the "Social Security is DOOMED" folks, check out: http://www.factcheck.org/article302.html

That was in 2005, things have changed a bit since then. The Social Security fund wasn't supposed to run a deficit until 2019, yet it's running one right now.

(2) J, you can get 50-60% growth in the next 20 years by growing between 2% and 3% annually: 1.02^20 = 1.5 and 1.03^20 = 1.8. That is, 2% annual growth gives 50% over 20 years and 3% annual growth gives 80% growth over the next 20 years.

Sure, but is it a realistic assumption considering all the things going on in the world economy these days?

[Uraniun235]

So, what's the problem with SS/Medicare/Medicaid? Are we wasting too much money to get necessary benefits to these people? What's the proper course to take with social services?

Seriously guys what's the argument here, do we need to change the program to better serve society, or are you literally arguing that we need to get ready to toss grandma out on the street?

I'm gonna keep posting this until someone responds with "no there's a better way that takes care of grandma and doesn't bankrupt us" or "yes we literally cannot afford to take care of old people and cripples".

[D.Turtle]

What needs to happen to make sure people are not starving and freezing to death on the street? I'll accept that a $500/month check may not be the optimal solution, but I will not accept the notion that it is literally impossible for us as a society to support our old and our crippled people.

According to the trustee report, the Social Security payroll tax would need to increase by about 2% in order to be fully solvent up to 2084.