Category Archive: Social Security
Comments Off on Entitlements driving Washington to trillion-dollar deficits
The Congressional Budget Office (CBO) recently released the “The Budget and Economic Outlook: 2017 to 2027.” This annual report provides the federal government’s most comprehensive analysis of the current state of federal spending, taxes, and debt. It also provides a framework within which to analyze the President’s budget proposal and upcoming Congressional legislation. The news is not good.
CBO projects that tax revenues over the next decade – 18.1 percent of the gross domestic product (GDP) – will exceed all other ten-year periods in American history outside of the 1990s. Yet spending will surge to 23.4 percent of GDP in a decade, resulting in a 2027 deficit of $1.4 trillion.
A decade from now, rising entitlement spending and interest on the national debt will consume 99 percent of tax revenues – forcing virtually the entire discretionary spending budget to be financed on the nation’s credit card.
Over the next decade, the national debt is projected to rise from $20 trillion to $30 trillion, and reach 107 percent of GDP for the first time since World War II.
Between 2009 and 2015, the deficit declined due to sequestration cuts, a modest economic recovery, and tax hikes. The deficit began increasing again last year, and – driven by entitlements and net interest costs – is projected to reach $1 trillion by 2023.
Washington will spend $31,154 per household this year. Federal spending is projected to jump another $5,800 per household over the next decade (adjusted for inflation).
Social Security, health entitlements, and net interest costs are responsible for $2.1 trillion of the $2.6 trillion growth in projected federal spending over the next decade. These items comprise 57 percent of current spending, yet will account for 82 percent of all new spending over the next decade.
Net interest costs – $241 billion in 2016 – are projected to reach $768 billion by 2027. And even that assumes interest rates remain far below historic norms. Rising interest rates would push budget deficits over $2 trillion within a decade.
Individual income tax revenues are projected to reach 9.7 percent of GDP in 2027 – the highest level in American history outside of bubble-inflated 2000.
The budget deficit predictably fell from its 2009 peak because the recession ended, taxes were increased, discretionary spending was capped, and low interest rates limited the net interest costs on new debt. However, over the next decade, sharply rising Social Security and heath care spending, higher interest rates on the national debt, and sluggish economic growth are projected to bring back trillion-dollar deficits. Lawmakers will face difficult decisions to rein in this spending and debt, and to ensure economic prosperity.
For full report click here.
Brian Riedl is a senior fellow at the Manhattan Institute. Follow him on twitter @Brian_Riedl.
Comments Off on Entitlement reform key to fixing America’s fiscal future
In his first address to Congress, President Trump lamented that “the past Administration has put on more new debt than nearly all other Presidents combined.” With federal debt approaching $20 trillion, he is right to be concerned about the rapid accumulation in recent years.
However, the president did not mention of Medicare and Social Security, two of the largest and fastest-growing federal programs, and he has previously stated that he sees no reason to reduce spending on these programs. Treasury Secretary Mnuchin reiterated last week, “We are not touching [entitlements] now, so don’t expect to see that as part of this budget.”
Without substantive reform, it will be exceedingly difficult to address the country’s long-term fiscal problems, and it will only get harder if needed changes are delayed.
Medicare and Social Security already account for roughly two-fifths of all federal outlays, and they will account for a growing share of the federal budget over the coming decade. Medicare, Social Security, and net interest payments on the debt will account for roughly 55 percent of federal outlays by 2027, an increase over their already significant share of 45 percent last year.
Source: Congressional Budget Office, “10-Year Budget Projections, January 2017,” Tables 1-2 and 1-3.
Entitlement spending growth is a major reason that budget deficits are projected to surge over the next decade. Although forecasting ten years in advance is notoriously difficult, the deficit is estimated to exceed $1.4 trillion by 2027 and accelerate further after that, with trillions added to the debt as a result. By 2045, debt held by the public will almost double, to 145 percent of GDP according to the Congressional Budget Office. It is practically inconceivable that politicians would not step in before this happened. However, if left unaddressed. debt at these levels would severely hamper economic growth, reduce living standards, and put increasing amounts of pressure on net interest payments and other areas of the federal budget.
Source: Congressional Budget Office, “Long Term Budget Projections, January 2017,” Supplemental Table 1. Annual Data Underlying Key Projections in CBO’s Extended Baseline.
Efforts to root out waste, fraud, and abuse, or to increase government’s efficiency are certainly worth pursuing, but proposals that eschew any kind of entitlement reform will leave the main drivers of debt in the long-term untouched.
Similarly, reducing regulatory barriers, improving the tax code, and generally developing a policy framework that allows the economy grow more rapidly are good ideas. To some extent, this could attenuate structural fiscal issues, but even higher rates of growth cannot make them go away. According to one recent estimate, productivity growth would need to be twice projected levels just to stabilize the debt at slightly lower levels as a percent of GDP. Doubling productivity growth rates would be an impressive accomplishment, but there is a limit to how much it can help the country get out of its debt problem.
This is why entitlement reform is key. The unsustainable nature of these programs face mean that some reforms will have to be implemented: the only questions are when and what kind of changes will be made. The longer these reforms are put off, the inevitable changes will by necessity be larger and more abrupt.
For example, the Social Security Trustees estimate that an immediate and permanent benefit reduction of 16 percent for all beneficiaries would be enough to make the program solvent for the full 75-year projection. If nothing is done until the trust fund becomes insolvent in 2034, an immediate 21 percent reduction in benefits would be necessary.
Phasing in a gradual increase in the retirement age indexed to increases with longevity, or using the chained CPI for cost of living adjustments are measures that could go some way to making the program sustainable without sudden, significant benefits or tax increases. Kicking the can down the road will only increase the magnitude of eventual disruption, when changes will have to be concentrated in fewer years and the burden will fall on fewer people.
Part of the political difficulty stems from the public. People are wary of reforms that could affect their benefits, and they lack understanding regarding which programs are the drivers of the country’s debt. In a recent poll, 46 percent of respondents said they thought foreign aid, which accounts for roughly one percent of the federal budget, contributes “a great deal” to the national debt, a higher proportion than for any of the other programs polled. It is laudable to take a hard look at spending at all agencies and to excise inefficient or wasteful spending, this alone will not be enough to improve the overall fiscal picture.
Without real reform, the important task of placing entitlement programs back on a sustainable trajectory will be left for later generations—at which point the country will be farther down this unsustainable path.
Charles Hughes is a policy analyst at the Manhattan Institute. Follow him on twitter @CharlesHHughes.
Comments Off on The answer is a new government program. What’s the question?
The Sunday Washington Post had a long, hagiographic article about Senator Mark Warner’s critique about how capitalism “isn’t working” for the masses and his heroic attempts to fix it that left me thinking I’m in an alternate reality.
The problem he sees is that the growing tendency of people to change jobs throughout their career has left people unprepared for retirement, and that we need to do more to make sure that workers have some sort of safety net to provide them with health care and income in their golden years.
That this was largely addressed decades ago with the introduction of Social Security and Medicare was completely missing from the article. Social Security is an incredibly progressive retirement program that provides everyone with a work history of at least ten years with a decent-sized benefit that doesn’t go up all that much for wealthier people who contributed much more. And Medicare is the largest government program there is, covering hospitalization costs, basic health costs and drug benefits for tens of millions of senior citizens. The government spends about $1.5 trillion each year on these two programs, and they make up the majority of our federal budget. There’s also plenty of evidence that they prevent seniors from indigence: the poverty rate for seniors is well below that of other age groups.
The current Administration also added an expensive entitlement that makes it much easier for people under age 65 who do not receive health insurance to obtain it, along with a healthy subsidy. For a family of four in Washington DC there is still a subsidy for an income of $80,000, which is well above the mean household income, and Medicaid completely covers those who don’t make enough money to buy their own health insurance. What more can we possibly do to make health insurance more affordable for the working poor?
The latest push of the Administration–and one that Senator Warner is leading–is to create some sort of government 401k. The idea is an awful one–the rationale is that since we move around to so many jobs, and since many employees do not provide a retirement plan, the government should do it for them. Earlier this year the Department of Labor made it much easier for the states to set up retirement accounts for their workers that would be administered by the state as an option for workers at firms without a retirement plan.
It is a supremely bad idea. For starters, there is no evidence that a public option is better than a private option, and plenty of data showing the contrary. For instance, the college savings accounts run by the states are no different than what people would get if they went to their local Fidelity or Vanguard office and opened their account, save for the fact that the latter would not come with a tax break, and the money in the government account has a sharply higher management fee than are found in the private funds. The Department of Labor just spent a year trying to drive down management fees in retirement accounts and they’re embarking on a new plan that would invariably create millions of accounts with higher management fees than they could get elsewhere.
Until recently liberals were in full defense of defined benefit pensions despite the fact that they disadvantaged people who had shorter job tenure and were more likely to change jobs, both of which tend to be truer for women than men. That they realize these don’t work in today’s economy is gratifying, but their insistence that the government create a vehicle to replace it is nonsensical.
If we want to nudge people to get a retirement account, we can do that without the state of Massachusetts inserting itself as a middleman. And politicians should stop pretending that there’s a senior citizen poverty crisis, no matter how flattering the Post may treat such efforts.
Comments Off on The Size of the U.S. Debt, Redux
What a difference just five years will make.
The U.S. national debt reached $19 trillion. How can we grasp such an unfathomable number?
Here at Learn Liberty, we’ve been trying to answer that question for years. In fact, our very first video attempted to contextualize the size of the then $14 trillion debt. With help of Duquesne University Professor Antony Davies, we illustrated how that debt was bigger than the entire global economy. That video went viral and has been viewed 646,000 times. Through it, Learn Liberty was born.
As part of our five year anniversary celebration, we have updated and modernized that video with new figures, graphics, and animation. Professor Davies explains that if we stacked up $100 bills, the $19 trillion U.S. debt would exceed the entire output of the U.S. economy. The size of the debt including unfunded obligations – future Social Security and Medicaid payments that the government doesn’t have the money to pay – would exceed the entire economic output of the entire planet.
Check out the re-mastered video and the original below. Any estimates on what the debt will be in five more years?
Comments Off on How to Fix Our Fiscal Crisis
The Congressional Budget Office announced last week that the growth of the federal budget deficit will outpace the growth of the economy in 2016 for the first time since 2009. The drag this places on economic growth is hard to overstate, but what can be done to solve this problem for the future? Harvard University’s Director of Undergraduate Studies Jeff Miron explains in this Learn Liberty video.
Peter Ferrara argues that Social Security benefits yield a lower rate of return than a typical blend of stocks and bonds. On top of this, it is highly unlikely that Social Security will be able pay all the benefits it has promised. Personal accounts, he argues, are the best alternative to the current Social Security system. Personal accounts would be great for workers, offering them a large asset that could be assigned to family, more choice, and the opportunity to own a portion of the capital stock.
Prof. Antony Davies analyzes Social Security in the United States through the lens of a typical 22 year old American. Assuming that Social Security is completely solvent, the expected return on investment (ROI) of Social Security is far lower than the expected ROI of a private account. Further, if an individual could hypothetically opt out of Social Security payments and invest the funds entirely in Treasury Bills, the Treasury bills would even yield a greater ROI.