A loyal reader of the Soapbox wrote this past week regarding the national debt. “Why is it,” the reader asked, “that some news reports say the national debt is already at or near 100 percent of GDP [Gross Domestic Product], while others say the debt is in the mid -70s or less? Is there a ‘right’ number?
It is a very good question that is central not only to our overall debate on the national debt, but importantly in discussions on Social Security and the fast-approaching “fiscal cliff.” Like most things in government, the answer is not simple, but it is nevertheless enormously significant.
Americans who are 30 years old or younger, in particular, should listen up.
To answer the immediate question posed by the reader, you get different ratios of national debt-to-GDP because organizations exclude different components of the national debt from their total.
For instance, at the end of November, the debt held by the public was approximately $11.5 trillion or about 72% of GDP. This is the lower and less alarming percentage of debt-to-GDP, which pundits and officials use when dismissing claims of an immediate debt crisis.
However, there is another component of the national debt – intra-governmental holdings – which is essentially the government borrowing money – and paying interest on it – to and from itself. In November, this figure was $4.8 trillion. Add it together and you get the total national debt of roughly $16.3 trillion.
As far as which number represents the “real” total debt, there is no argument.
Congress sets the amount of money the government is allowed to borrow. After the budget crisis over a possible sovereign default in the summer of 2011, Congress raised the amount of money that the Treasury could borrow to $16.394 trillion. So for the purposes of official budgeting, it is both the public debt and the intra-governmental debt together that constitute the total national debt.
For the purposes of calculating debt-to-GDP based on this unified figure, the Commerce Department reported that Q3 GDP for the US was $15.8 trillion (with four weeks left in the final quarter for the year, yet to be added). That means that the official US debt to GDP is 104% – a level the US last reached during WWII. By way of contrast, German debt-to-GDP is 82 percent. Ireland, recipient of an EU bailout, is at 108 percent. And China? An enviable debt-to-GDP ratio of 43 percent.
That’s right. The communists are better money managers than we are.
OK, so we know that the total national debt includes the intra-government transfers. So why is that important to the fiscal cliff and specifically to Social Security?
In the initial positioning on the fiscal cliff, Republicans have laid out a broad plan that would trade revenue increases (by reforming the tax code and eliminating loopholes), for tangible entitlement reform (Social Security, Medicare and Medicaid).
Democrats immediately shot that down with Harry Reid stating emphatically that Social Security was off the table in the fiscal cliff budget talks. Appearing on Meet the Press, Reid said, “One of the things that always troubles me is when we start talking about the debt, the first thing people do is run to Social Security. Social Security is a program that works. And it’s going to be– it’s fully funded for the next forty years. Stop picking on Social Security.”
For good measure, Reid’s #2, Dick Durbin added “Social Security has not added one penny to the deficit.”
But the sad and alarming fact is that Reid and Durbin are both terribly wrong, and the intra-government debt is the proof. To fully understand this, we must look at the key component of intra-government debt, and that begins with a quick overview of Social Security.
The Social Security Trust Fund, administered by the Social Security Administration, collects payroll taxes from workers and employers and makes benefit payments to retirees, survivors, and the disabled. Contrary to what many Americans believe, Social Security is a “pay as you go” system, where payments collected today are immediately used to pay benefits. There is no “savings account” per se.
Still, over the last 30 years, when the Baby Boomers were in their prime working years, Social Security was flush, taking in more in far more in payroll taxes than it was paying out in benefits.
But that surplus, about $2.7 trillion, was “borrowed” by the Treasury Department in an intra-government transfer over the decades, which was then used to fund other government programs on an annual basis. In return for the actual hard cash, Treasury deposited interest bearing bonds in the Trust Fund – an Uncle Sam IOU.
This intra-governmental transfer – the government effectively borrowing from itself – creates a surreal parallel universe in budgeting matters.
For Reid and Democrats, the bonds deposited by Treasury in the Social Security Trust Fund are tangible, interest bearing assets that are redeemable. For official budgeting purposes, the Congressional Budget Office (CBO) agrees, projecting that with these assets, Social Security will be solvent for decades. When payroll tax collection and interest on the bonds no longer covers the bill for the greatly expanded number of retirees to come as the Boomers go to Florida, the Trust Fund can begin redeeming its bonds to cover any shortfall.
But that’s the problem.
The bonds that Treasury has issued to the Trust Fund – as well as the interest those securities are generating – are not secured by anything more than the promise of the federal government to pay at a later date.
For the purposes of clarity, the US government did not borrow the Social Security surplus and invest it in something that generated greater returns than the interest Treasury was paying to the Trust Fund. It simply used the money to fund current expenses – nothing different than a consumer using a credit card to cover a shortfall at the end of the month – except that the feds did it with a generation’s worth of retirement money.
That is why the intra-government borrowing component of the debt is relevant.
There is no seperate account holding Social Secuirty investments for disbursement when the time is right. The fact is that almost 60 percent of the $4.7 trillion in intra-government borrowing represents Social Security IOUs that are going to come due. And here the math is the same as it is with the debt as a whole. The US will either have to significantly cut discretionary spending (including defense) or raise taxes in order to retire (pardon the pun) this liability. Fulfilling this obligation does not come without significant economic pain for most Americans.
Far from being a self contained program that has no relationship to the debt question, Social Security is, in fact, a central component of the debt question and must be part of a comprehensive solution.
Indeed, the “fuzzy math” involved with Social Security calculations isn’t just a “down the road issue; it’s an immediately problem that, contrary to Senator Durbin’s statement, is adding to the deficit now. Consider the following data from the CBO:
| Social Security Income (billions) 2013 | |
| Revenue | 675 |
| Interest | 110 |
| Other Income | 70 |
| Total | 854 |
| Social Security Payout 2013 | |
| Benefit Payments | 819 |
| Surplus/Deficit | +35 |
Looks good, right? Social Security is still in the black. This bears out Senator Reid’s premise.
But as you see, $110 billion of Social Security’s total income is from interest on the Treasury-issued bonds. Treasury pays that interest by – wait for it – issuing more bonds.
Thus the actual cash flow for Social Security is already negative.
That deficit was $58 billion in 2012. In 2013 it will be a negative $75 billion. In 2014 it will be negative $82 billion, and it increases each year after. These deficits are covered by general revenues to the Treasury, not from Social Security, so, like it or not, the program has added and is adding to the federal deficit each year, with a growing share to come.
When we consider the fiscal cliff, it is not simply a challenge with immediate spending cuts and tax increases, but also a crisis involving the drivers of additional borrowing that lead to the contentious fights on the debt ceiling as the US sinks even further into debt. Far from being a self contained bank for seniors, Social Security is a key driver in that debt equation (as are Medicare and Medicaid) and must be put on the table if we are serious about getting our fiscal house in order. Politicians who promise otherwise are doing a serious disservice to their constituents and the American people.
A few facts here for younger Americans.
The Administration on Aging reports that over 60% of households headed by those over 65 have incomes at or near the US median. 26 percent had incomes exceeding $75,000. Further, CNN Money reported that households headed by those 65 and older had 47 times as much wealth as those aged 35 and less.
These are the people receiving Social Security.
In November, voters 18-29 (nearly 20 percent of the total vote) supported President Obama by 60-37 percent. In the current budget fight, President Obama and the Democrats have proposed tax increases on the wealthy, with no corresponding reform for entitlements, including Social Security.
As of today, $2.7 trillion of America’s national debt is in the form of IOUs to Social Security. If Social Security remains unreformed, those IOUs will be redeemed over the next 30 years, requiring punishing new taxes or painful spending cuts across government programs; mostly likely a combination of the both, to support the flood of retirees. And having retired the burden of the generation preceding it, Millennals will approach retirement with….what exactly?
Republicans recognized the entitlement reckoning on the horizon in the recently concluded campaign, and were rejected soundly by America’s youth. Rarely in history has a demographic voted so decisively against common sense and its own interests, to the detriment of the nation as a whole.