Social Security: The Latest from Senate Democrats

 

http://www.dailykos.com/story/2014/02/14/1277624/-Bernie-Sanders-Leads-15-Other-Senators-in-Letter-Urging-Obama-Not-to-Cut-SS-Medicare-or-Medicaid

The Daily KOS carried a story about the letter 15 Senate Democrats delivered to President Obama.  In it they ask the President not to include cost cutting to the Social Security program as part of his budget proposal.  They claimed:

"Social Security has not contributed one penny to the deficit. Social Security has a surplus of more than $2.7 trillion and can pay every single benefit owed to every eligible American for the next 19 years."

But they failed to mention that the Social Security Trustees have been warning Congress since at least 2005 that they need to make timely reforms to the program.  What reforms do these Senators propose in their letter?  None.

So while it may be true that Social Security hasn't contributed to the deficit, it's not true that it won't be.  The WH OMB 2014 Budget showed Social Security Outlays exceeding Social Security Payroll Tax Receipts by $1.8 trillion dollars over the next ten years.  And while the trustee report showed that Social Security benefits could be paid at current value until 2033, it also said that after that there would need to be a substantial reduction in benefits.  Substantial as in 23%.

Each year Congress delays in making necessary reforms to Social Security the consequences are that the required reforms are larger than if made before.

So why do the 15 Senators want us to wait?  I don't think they will be changing their minds any time soon.  So it appears that the best way to make sure that Social Security is saved is to make sure as many as possible of the 15 Senators are defeated in this year's elections. 

The 15 Democrats who co-signed the letter are the following:
Tammy Baldwin (D-WI)
Mark Begich (D-AK)
Barbara Boxer (D-CA)
Richard Blumenthal (D-CT)
Al Franken (D-MN)
Kirsten Gillibrand
Mazie Hirono (D-HI)
Tom Harkin (D-IA)
Patrick Leahy (D-VT)
Edward Markey (D-MA)
Jeff Merkley (D-OR)
Jack Reed (D-RI)
Brian Schaz (D-HI)
Elizabeth Warren (D-MA)
Sheldon Whitehouse (D-RI)

Gross Negligence

The Case Against Washington’s Handling of the Federal Budget

by Alan R. Davis

 

(Written in 01/31/2012, still valid today.) 

Those in Washington aren’t dealing with the budget seriously.  In fact, some in DC are doing their best to convince the country the problem isn’t nearly as bad as it really is.  My concerns fall into five main areas:

-          Washington has invented terms to help ignore the extent of the crisis

      -          The budget includes unrealistic assumptions
      -          There is an oncoming tidal wave of Interest Outlays
      -         The budget is built on legislation that won’t stand
      -         The extent to which individuals depend on the Federal Government

“Invented” Terms:

One of the most frustrating things for me is the fact that rather than face the crisis, Washington has come up with new terms to make the budget crisis look less severe.  Those terms are:

Primary Deficit: The deficit excluding Net Interest Outlays. It allows Washington to claim that they have balanced the budget when they have made little progress in doing so.

Publicly Held Debt:  While this isn’t a new term, using it as the bench mark as opposed to Total Debt is new.  This allows Washington to ignore the fact that it has used intra-government debt (borrowing from the trust funds) as a major source of funds for the general fund.  We’ve seen Non-Public debt grow from ~10% to~ 35% of total debt since WWII.  Comparisons to Post WWII are erroneous for two reasons.  First, we started WWII with relatively low levels of debt compared to the size of our economy.  Second, our current debt was largely built up during times of relative peace, rather than during a major worldwide conflict.  You won’t even find Total Debt in last year’s budget analyses put out by the CBO!

Unrealistic Assumptions:

I first looked at the WH OMB (summary tables) in 2009 after the 2010 budget proposal was released. I was interested in seeing how they calculated Interest outlays.  (Tracking interest rate trends is a hobby of mine.)  I started with the Economic assumptions and was surprised.  The values for each of the five key assumptions appeared to be overly optimistic making the projections meaningless.  I’ve been following the budget ever since.  This year I concentrated on the inflation assumption values.  I found that both the WH OMB and CBO are using assumptions that can’t be supported by historic trending or basic economic principles.  In the original budget projections the WH OMB projected 2.0% and 2.1% as the average and maximum inflation assumption values.

Understating the values for the inflation assumptions has two significant impacts:

Compounding:  Low values compound much slower over ten years than higher values do.  That results in lower “out year” outlays and deficits.

Interest Rates:  Understating inflation allows them to use lower values for interest rates as there is a correlation between the two over the long run.  Each 1% understatement of the “effective rate” (Net Interest Outlays divided by average debt) understates Net Interest Outlays by $200 billion in a year when the National Debt (Total) is $20 trillion.  The original budget included 7 years where debt exceeded $20 trillion.

Interest Rate “Tidal Wave”:

In the early 1990’s we became concerned over the size of the debt as we saw Net Interest Outlays increase dramatically.  This occurred as interest rates decreased to “normal” levels.

90's Average:  $216 billion Net Interest on $4.6 trillion debt (Fed Fund Rate of 5.2%)

In 2010 we incurred less Net Interest Outlays on nearly three times the level of debt. 

2010:               $197 billion Net Interest on $13.4 trillion debt (Fed Fund Rate of 0.18%)

The Treasury Dept. has been utilizing a substantial amount of short term maturity instruments to finance our debt. Even long term maturity instruments have been issued at unsustainably low rates.  Once the FRB increases rates (they have indicated that will occur in 2014) it will dramatically increase the interest we’ll be paying on our Debt.  It means we have a built in “tripling” of Net Interest Outlays at current debt levels that is not being properly considered by Washington.

Legislative Assumptions:

Budget projections are built on current legislation.  The best example of how this distorts the projections is the Medicare “Doctor Fix”.  It is addressed for one year each year so as to allow the cost cutting impact of the law to be used in projections.  But the intention is to not allow the dramatic cut to physician payments to ever take effect.  There are several other items like this that allow the projections to reflect much smaller deficits than would otherwise be shown.

“Individuals” & the Federal Budget:

I ran across a historic schedule on the WH OMB website that broke out Outlays in much different categories than I had previously seen.  That schedule showed the following for 2010 Outlays:

National Defense:                      20.0%

            Net Interest:                                 5.7%
            Payments for Individuals:          66.5%
                          Subtotal                         92.2%
             Other Grants:                               5.8%
             All Other:                                     2.0%
                          Total                            100.0%           

With so much of the Federal Budget going to individuals (directly or indirectly through state and local governments) any serious cuts to the Federal Budget will have serious consequences for towns like Chillicothe. Add in the fact that soon we will see a dramatic increase in Net Interest Outlays and the size of required cuts to balance the budget are staggering!  Yet this isn’t being properly discussed in Washington.

Unless the real extent of our Nation’s financial crisis is brought forward for public debate, we won’t see it properly addressed and financial collapse becomes more likely.  Addressing it appropriately will result in real hardship for many.  But unfortunately hardship comes either way.

 

“There are two ways to conquer and enslave a nation.

One is by sword.  The other is by debt.”

John Adams 1826

“The battle, sir, is not to the strong alone; it is to the vigilant, the active, the brave.”

“Eventually Increasing the Risk of a Fiscal Crisis”

By Alan R. Davis

“Such large and growing federal debt could have serious negative consequences, including restraining economic growth in the long term, giving policymakers less flexibility to respond to unexpected challenges, and eventually increasing the risk of a fiscal crisis.”  CBO Director Douglas Elmendorf to Senate Budget Committee 2/11/2014

See more at: http://cnsnews.com/news/article/susan-jones/cbo-director-large-and-growing-federal-debt-could-produce-fiscal-crisis#sthash.JVxpfDmA.dpuf

On Tuesday February 11, 2014 Director Elmendorf of the Congressional Budget Office warned the Senate that the Nation’s increasing federal debt “could have serious negative consequences” including “…increasing the risk of a fiscal crisis”.  His choice of words was intriguing. It’s a lot like watching someone’s house on fire and saying that it “could have the serious negative consequence of increasing the risk of having to find alternative housing”.  If someone’s house catches fire they WILL have to find alterative housing, at least for awhile.  And having already run deficits for all but four years since 1969 we already have a fiscal crisis.

Washington is full of tricks to keep from recognizing the size and immediacy of the crisis.  Just a few of them are:

-          Using unrealistically low values for the inflation and interest rate assumptions in their projections.  Both the CBO and WH OMB have made a habit of using artificially low assumption values.  The CBO is projecting inflation won’t exceed 2.4% and the WH OMB used 2.2% in their 2014 Budget.  We’ve only had nine years of inflation that low or lower since 1965.  Each of those were years of recession or extremely low economic growth.  Using low inflation values allows them to use low interest rate values since they are in large part based on inflation.

-          Using current law even when Congress makes a habit of ensuring that some of current laws’ provisions don’t get implemented.  There's no better example than the required reduction in physician Medicare payments.  Each year Congress passes the “doctor fix” which applies to only one year leaving the required reduction in the remaining nine years of projections.  I believe that’s gone on for 15  years and the current value for the reduction is 24%.

-          Using newly defined ratios.  Look back prior to the WH OMB’s 2012 Budget and see if you can find any reference to “Primary Deficit”.  I didn’t.  But now they calculate the deficit without Net Interest Outlays because Net Interest Outlays are about to explode.  They also use Public Debt to compare to GDP rather than using Gross Debt because we've already exceeded 100% of GDP when Gross Debt is used.  100% is the "point of no return."

-          We all know how Washington also used the Government Trust Funds as a “free” source of funds.  There's no better example than the Social Security Trust Funds.  Individuals were required to contribute into the trust funds so there would adequate funds to pay future benefits.  But the money has already been borrowed to offset General Fund Deficits.

The CBO’s baseline projection report starts by showing a graph of budget results from 1974 through the 2023 projections.  There are only four out of those forty one years in which we've had surpluses.  For a Nation that had more than twice as many surpluses than deficits in its first 140 years of existence that’s a terrible record.  We once believed we should run surpluses in times of peace and prosperity so we could run deficits in times of war and economic difficulty.  Now we accept deficits just because we've happened to run them in the past.  That’s a sure sign of a significant fiscal crisis.

 

When is Waiting the Wrong Answer

By Alan R. Davis

Sometimes some caution is a good thing.  And I’m usually not the first to rush in and do something.  But other times you have too.  When the neighbors log pile was on fire I couldn’t wait to see if it got bigger or possibly went out on its own.  I acted quickly.  And that kept the action necessary to resolve the problem from getting larger, like bringing in multiple fire trucks.

Well, I can’t help but wonder why Congress is waiting to pass necessary changes to Social Security?  Do they think that the Trustees are just calling “Fire” for the fun of it?  Ever since at least the 2005 trust fund report they have included some reference to making changes soon!  In 2005 they added the following:

“The sooner the adjustments are made the smaller and less abrupt they will have to be.”

That year the projection showed the trust funds running out of funds in 2041.  Eight years later they showed the trust funds running out of funds in 2033.  So as eight years passed with no Congressional action, the exhaust year got sixteen years closer.  If things continue at that rate the real exhaust year will be 2023, not 2033.

In the same period of time the trustee report’s estimate of the increase in withholding rate that would be required to maintain the trust funds’ viability has gone from 1.92% to 2.72%.  That’s quite a jump.  And it will only get bigger the longer Congress delays.

Under President Bush changes were proposed, but Democrats in the Senate and House said “NO!”  And in 201,1when it looked like President Obama and House Republicans might be willing to work a deal, Democrats in the Senate held their “Hands Off Social Security” rally.  They helped stop changes from being implemented with statements like Sen. Reid’s when he said

“Let’s worry about Social Security when it’s a problem – today it’s not a problem.”

Reports on his appearance on MSNBC just a week before quoted him as saying

“he would only be open to changing the program in 20 years.”

What will it take to change the mind of Senate and House Democrats?  It’s hard to tell.  But it’s not hard to determine the consequences of any further delays in implementing changes.  This is one time this type of extreme caution before acting is a real problem!

The Federal Budget's "Hidden" Surprise

By Alan R. Davis

The Federal Budget is hiding quite a surprise and it’s not going to be one that any of us will like.  The best way to see the surprise is to look up historic spending.  Look up the Net Interest Outlays for 2000 and you’ll find the number $232 billion.  That year we had an ending debt of $5.6 trillion dollars.  Now jump forward to the year 2012.  You’ll find we had Net Interest Outlays of $232 billion with an ending debt of $15.4 trillion.  Nearly three times the debt with the same level of interest?  Yes.

The Federal Reserve Board has lowered interest rates in hopes of spurring on economic growth.  The 10 Year Treasury rate averaged 6% in 2000 and only 1.8% in 2012.  But you don’t have a healthy economy maintaining artificially low interest rates over the long run.  At some point in time they will be raised to more normal levels.  What the more normal level might be is still being debated.

So if we know rates are lower than can be expected then we also know that Interest Outlays are lower than they will be, even if the National Debt would remain at its current level.  Historic trending would indicate that both short term and longer term rates will increase by 3% to 4%.  That’s if they adjust to “normal” rates rather than increasing more than that.  Then the math is pretty easy.  3% times $18 trillion equals $540 billion. 

$540 billion per year is the “hidden surprise” already built into the budget.  So when members of the DC establishment talk about a $700 billion deficit, they aren’t factoring in this hidden surprise.  The real size of the deficit problem is the current deficit plus $540 billion.  So it’s more like $1.2 to $1.3 trillion. 

So much for President Obama’s statement that he’s brought down the deficit by 50%.  Once rates increase we’ll be back to trillion dollar deficits like before.

What the CBO Actually Said

By Alan R. Davis

“Did you see the latest report on Obamacare from the non-partisan Congressional Budget Office (CBO)?  They're projecting 2.3 million people will leave the workforce by 2017 as a direct result of Obamacare.”

The above comes directly from an email I received from a prominent Republican Senator.  What makes it worse is this particular Senator had a career in business before being elected.  I hate to correct them, but that’s not what CBO told us or the point they were making.

What they said was they estimated that workers will voluntarily reduce hours by approximately 92 million per week because of the disincentives built into the Obamacare program.  (92 million divided by 40 hours per week = 2.3 million F(ull) T(ime) E(quivalent)s.)  Some of those hours may be from individuals dropping out of the workforce, but in many cases it would be from them reducing their hours.  But in each case it would be voluntary and a result of the adverse incentives Obamacare has built into it. 

So the statements regarding 2.3 million lost jobs or 2.3 million people leaving the workforce just aren’t accurate.  And the statement that for some people this might be a good thing is most likely be true.  Some people may be able to access insurance while working fewer hours now that Obamacare is law.

Since in a rationale economy hours are offered because there is an actual need for the hours to be worked, a voluntary reduction in hours by some should mean hours available for others.  Just as an example, if an individual working the counter at a McDonalds voluntarily works fewer hours the employer has two choices.  Don’t fill those hours or find someone else to work them.  Most likely they will look for someone else work those hours or else the person wouldn't have been working them in the first place.  That person will either be a current employee who would like more hours or a new employee.  So this may actually be a good thing for those looking for work.

The point that the CBO was making is that Obamacare gives negative incentives to people.  And those negative incentives come with a cost to our Federal Budget.  It’s called “subsidies”. 

With over 65% of all Federal Outlays going to “Payments for Individuals” ⁽¹⁾ and with the Federal Government already facing huge deficits, how many more subsidies can we afford?  The answer is none!  And the reality is the Federal Government needs to have a substantial reduction in its deficits in order to bring some sanity to our Nation’s finances.  More subsidies isn’t the way to do that.

(1)   Source: Historic Table 11.1, 11.2 & 11.3.   http://www.whitehouse.gov/omb/budget/Historicals

Clinics for the Uninsured

By Alan R. Davis

 Last night (2/7/14) on “The Factor” Bill made the suggestion that the Federal Government should open up clinics for the uninsured.  That leads me to believe that he's one of the many people wrongly equate “Lack of Insurance” with “Lack of Access to Healthcare”.  However the two aren’t equal.  There’s a long history of improving access to healthcare for the “poor” in our country.  Having recently taught a course in Healthcare Finance I covered that topic.  A few of the highlights follow.

At the founding of our country healthcare was provided by physicians in individuals’ homes.  A good reminder of that is the scene from the HBO series “John Adams” in which his daughter underwent breast surgery (for cancer) in an upstairs bedroom. 

By the mid 1700’s there was a growing sick homeless population in Philadelphia so Ben Franklin and Dr. Thomas Bond worked to establish the first hospital in the colonies.

" Faced with increasing numbers of the poor who were suffering from physical illness and the increasing numbers of people from all classes suffering from mental illness, civic-minded leaders sought a partial solution to the problem by founding a hospital.”

http://www.uphs.upenn.edu/paharc/features/creation.html

The use of hospitals for caring for the sick spread in Europe before it did in the new country formed from the colonies.  So during the second half of the 1800’s groups from religious sects in Europe came to the United States for the purpose religious freedom and caring for the poor.  This resulted in a significant increase in the number of  hospitals.  The most common were Catholic based and run, staffed by nuns.  SSM Healthcare (St. Louis, MO) is just one of many Catholic Healthcare Systems that were established.  Other religious groups followed suit.

http://www.ssmhc.com/internet/home/ssmcorp.nsf/documents/our+heritage+of+healing

Cities, counties and states set up hospitals to care for the poor.  They became known as “charity hospitals”.  Two of the more famous are Cook County Hospital in Chicago and Ben Taub General Hospital in Houston, but they were prevalent in many cities.

http://en.wikipedia.org/wiki/Cook_County_Hospital

http://en.wikipedia.org/wiki/Ben_Taub_General_Hospital

In order to improve access to healthcare and allow hospitals access to funds for construction Congress passed the Hill-Burton act.  Those organizations using Hill-Burton funding were required to give a “reasonable amount” of charity care.

http://en.wikipedia.org/wiki/Hill_Burton_Act

As charity care facilities became overwhelmed, Congress enacted “anti-dumping” laws making it illegal to transfer emergency patients to county facilities based on the patients lack of financial resources.  Failure to comply with those restrictions was grounds for exclusion from the Medicare and Medicaid programs.

Community Health Centers have existed for some time.  Their primary purpose is to allow healthcare access to those who lack insurance or have Medicaid coverage.  The Federal  Government has acted multiple times in the recent past to strengthen this system.

http://en.wikipedia.org/wiki/Community_health_centers_in_the_United_States

http://en.wikipedia.org/wiki/Federally_Qualified_Health_Center

 In recent years there has been a move to establish “free clinics” offered by volunteers that are shielded from malpractice suits by “Good Samaritan” laws.  That trend continues as individuals of faith and good will see this as a way to practice their faith.  An example of such a clinic exists in Chillicothe, OH.

http://www.hopeclinicfree.org/services.html

 

Under the previsions of the Medicare and Medicaid programs hospitals who accept patients from those programs must offer charity care and post their charity care guidelines.  Failure to comply can result in organizations' exclusion from those programs.

So access to healthcare for the poor has been a consideration since before our nation was founded.  And access has been improved over the centuries.  The question has always been the type of access and the ability of the Nation to support it.

 

While the rallying cry of those supporting universal healthcare is "the richest Nation in history can afford it" the truth might be that the "most indebted Nation in history" may have reached the limit on what it can afford?

 

 

Social Security – Another Set of Democrat Lies?

By Alan R. Davis

Social Security is used as a political issue for many Democrats despite their original campaign rhetoric and the reality facing the program.  How long can this go on before people understand that’s the case?

Let’s take Sen. Mark Pryor for example.  According to “On the Issues.org” he signed on to The Hyde Park Declaration in 2000 which included the following Goal for 2010:

“Make structural reforms in Social Security and Medicare that slow their future cost growth, modernize benefits…, and give beneficiaries more choice and control over their retirement…”

And his 2002 campaign website had the following statement on it:

“This safety net must be maintained if we are to ensure that our seniors will have a sound income in their golden years.”

http://senate.ontheissues.org/Economic/Mark_Pryor_Social_Security.htm

He’s just one of many Democrat Senators who have promised to work to ensure reforms are made to the program, but who now opposes any suggested changes and criticizes those who put them forward or supports those efforts.  Just look at the commercials his supporters are running against Rep. Cotton.

But while Sen. Pryor helps stop any changes from taking place, what do President Obama’s cabinet members say about the need for changes to the Social Security program?  The Sec. of Treasury, Sec. of HHS and Sec. of Labor are three of the trust fund trustees.  Since at least 2005 the trustees have included statements like the following in their trust fund reports:

“The projected combined OASI and DI Trust Fund asset reserves…begin to decline in 2021, and become depleted and unable to pay scheduled benefits in full on a timely basis in 2033.
 
…The Trustees recommend that lawmakers address the projected trust fund shortfalls in a timely way in order to phase in necessary changes and give workers and beneficiaries time to adjust to them.

With informed discussion, creative thinking, and timely legislative action, Social Security can continue to protect future generations.”   Source: 2013 Trustee Report

http://www.ssa.gov/OACT/TRSUM/index.htm

Some Senate Democrats do even worse.  They lie about the status of Social Security.

“SEN. DURBIN:  Social Security does not add one penny to the deficit.   Social Security untouched will make every promised payment for more than 25 years.  But the deficit commission was given a charge, add 75 more years of solvency to Social Security. …   The Social Security program, as it's currently put together, does not have any impact on the deficit.”  Source: Meet the Press transcript; February 20, 2011.

SEN. REID: “Social Security has not contributed one penny to the deficit, … It’s in great shape for the next many decades.  Let’s worry about it when it’s a problem – today it’s not a problem.”   Source: The Fiscal Times; March 28, 2011; Michelle Hirsch

Even a quick look at the WH OMB’s 2014 Budget (Table S-5 page 189) shows those claims to be untrue.  It shows Social Security Outlays projected to exceed Social Security Payroll Tax Receipts by $1.8 trillion over the next 10 years.  The projected 10 year shortfall was only $200 billion in the 2010 Budget.  So as the Social Security Trust Funds rapidly approach the point when they run out of money and mandatory cuts in benefits are required, Democrats continue to act as if this was hardly an issue at all.  And despite initially campaigning on promises to save Social Security, they now criticize anyone who tries.

Could it be that the same party that lied to us when they told us that “you can keep your insurance if you like it” is also lying to us about the lack of need to address Social Security reforms any time soon?

Primary Deficit

Comments on Washington Use

By Alan R. Davis

For years I’ve wanted to go to the Davis Mts. in west Texas.  This year an opportunity has come up.  Since it’s probably going to be the only time I’ll go, I’d love to get a new camera and set of lenses for the trip. But these are pretty expensive items and don’t quite fit into our family budget.  But after reviewing the Congressional Budget Office’s 2014 baseline projections I’ve come up with a strategy to try on my wife. After all, it seems to work in Washington.

When I talk to my wife I’m going to talk about our “primary budget”.  I’ll leave out our mortgage payment.  That way I can convince her that we actually have a large budget surplus and can afford the camera equipment after all.  However I fear there’s one small problem.  I don’t think she’s dumb enough to buy that argument.

So why do we see “Primary Deficit” in the Congressional Budget Office and White House Office of Management and Budget documents?  “Primary Deficit” is defined as the difference between Receipts and Outlays minus Net Interest.  The first time I found “Primary Deficit” shown on the WH OMB’s table of Proposed Budget by Category was in the 2012 Budget documents.  But now it appears to be a standard feature of Budgets and Mid-Session Reviews and CBO Baseline projections.

Creating a new ratio that leaves out a major component of the budget is certainly a creative way of solving budget problems.  But does it really do anything solve the problem?  Of course not!  It’s actually harmful since it allows some individuals to claim we're making progress when we’re actually falling further behind.

One of the major problems that the Nation faces in regards to its budget is the fact that Gross Debt has grown so fast and so large.  Once interest rates return to “normal”, Net Interest Outlays will explode.  A simple example of that can be seen by multiplying 3% times $18 trillion.  3% represents the approximate amount that current interest rates fall below “normal” levels.  $18 trillion is the amount of debt the Nation will have at the end of its fiscal year 2014.  The result of that math is $540 billion.  That’s the amount of Interest Outlays that’s already built into the Nation’s future budgets based strictly on the fact that someday interest rates will return to normal.  Imagine if we get higher interest rates like we did in the 1980’s!

So who came up with the idea of creating a new ratio excluding Net Interest Outlays?  I don’t know, but I do know that I’ve heard individuals who would like us to believe that our debt levels aren’t a problem talk about “Primary Deficit”.  I wish those individuals had to talk to my wife about it.  I can already hear her saying “How dumb do you think I am?”

The CBO’s Table 1.1 (page 9) shows both the 10 year projected Deficit ($7.9 trillion) and Primary Deficit ($2.1 trillion).  But what value is it to know that the deficit without Net Interest Outlays is $5.8 trillion less than the real Deficit?  It only gives someone a talking point that sounds good while ignoring the reality that our Budget is spinning out of control due to the huge deficits and increase in debt.  I hope people in Washington aren’t buying it either.

Measures of Debt

Comments on the CBO Baseline Projections

By Alan R. Davis

The Congressional Budget Office (CBO) has released their 2014 projections in a 182 page document.  Comments in this “blog” related to the topic of the Nation’s Debt covered in that document.

The CBO lists four measures of Debt:

-          Gross Debt: All debt of the Federal Government

-          Debt Subject to Limit: Basically the same as the Gross Debt but relating to the authorized limit passed by Congress.

-          Debt Held by the Public: Excludes Debt Held by Government Accounts (Trust Funds) but does include that amount held by the Federal Reserve Board.

-          Debt Held by the Public less Financial Assets: A technical definition that is difficult to calculate because of the difficulty in measuring value of the Financial Assets

The CBO explains the rationale for concentrating on the “Debt Held by the Public” as follows:

“(Debt held by the trust funds)...does not directly affect the economy and has no net effect on the budget.”

So because of that position, it’s hard to find figures for Gross Debt in their report and they repeatedly use Public Debt figures in their analysis.  But let’s look at that statement to see if stands up to scrutiny.

“…has no net effect on the budget.”:  What they are telling us is since the government is the issuer and the borrower, those two transactions cancel themselves out.    Also since the government is paying the interest and receiving the interest those also cancel themselves out.   On a strict accounting basis, that may be true for any given year.  But it’s not true from the perspective that the government has more debt that it must pay back at some point in time. 

According to the trustees of the Social Security and Medicare trust Funds, that point is coming relatively soon.  In fact the 2013 Trustee Report shows that occurs beginning in 2021.  At that point, not only will the Federal Government have to borrow funds to support the General Fund’s deficit, but also to start paying back the trust funds.

 “…does not directly affect the economy”:  Economists in Washington tell us that borrowing funds from the trust funds doesn’t impact the economy in the same way as borrowing directly from the public.  They justify this theory by saying the funds are sitting idly in the trust funds, while those borrowed from the public are no longer available for use by the private sector economy. 

How do the funds make it into the trust funds?  They are accumulated through payroll taxes which take money out of the economy.  And when it’s time for the IOU’s to be paid off, the General Fund will have to increase its borrowings taking more funds out of the economy than otherwise would be required.  So over time borrowing the surpluses from the trust funds to support deficit spending not only puts the viability of the trust funds at risk, but it increases the long term borrowing needs of the General Fund.

Let’s put that in real terms from my life.  My parents stressed that I should go to college.  Coming from a large family with moderate income, they told me I needed to make a sincere effort to pay for as much of my college education as I could.  So beginning in my junior year of high school I stopped running track and cross country and got a job.  I saved as much as I could and put it in a "college fund".  When I got my drivers’ license I had to share a family car rather than have one of my own.  Had I used the Government’s logic, I could have used the funds I had saved for my college education to purchase a car since they were sitting idly.  I could have just issued my college fund IOU’s for the amount I used.  However, when I finally went to college those funds wouldn’t have been available, would they.  How would I have paid for college?  I would have had to borrow the money.

 

Ignoring the government account debt is just a way to justify deficit spending and to keep from having to recognize that our Debt to GDP ratio is now over 100%.

Is There a Crisis with Social Security?

There still seems to be some debate on whether the Social Security Trust Funds are facing a crisis and require changes to the Social Security program for them to remain well funded.  As long as that debate exists there’s little chance that any meaningful reforms will be made.

There are two sides to the debate.  One side talks about the size of the trust fund balances, the fact that those balances have been growing over the years and the fact that the trust funds have been able to meet all their obligations in past years as evidence that there isn’t an immediate crisis.

The other side talks about the fact that the number of those drawing benefits is growing rapidly, especially now with the beginning of the retirement of the Baby Boomer generation.  They talk about the trust fund projections showing that the balances will be decreasing rapidly in the coming years and that the burden on future generations of workers will become unsustainable without fundamental reforms.

Let’s look at the comparison of  some information from the 2005 and 2013 trustee reports.

Some statistics on the change from 2004 to 2012:

-          Increase in workers contributing to Social Security:                   2.5%

      -          Increase in those receiving benefits from Social Security:        18.8%
      -          Increase in annual benefits paid:                                                59.4%
      -          Increase in total trust fund income:                                            27.7%
      -          Decrease in annual surplus:                                                       -67.3%
      -          Increase in unfunded liability for Social Security:                   140.0%

http://www.ssa.gov/history/reports/trust/trustreports.html  (Reports on the year 2004)

http://www.ssa.gov/OACT/TR/TR05/index.html  (Reports on the year 2012)

In additional postings we’ll look at what some of the parties on each side are saying on this topic.