Monday, February 23, 2015

Fundamentally Flawed - Chapter 3, American Economic Scoreboard

by, Chris Hamilton, February 2015

The chart below is a snapshot of relative sizes of all assets, the economic and tax base, and all liabilities within America. 
Unfunded Liability Source: 2013 OASDI and Medicare Trustees’ Reports. (pg. 183); Pension Source, Bureau of the Fiscal Service; Federal Debt Source, Dept. of Treasury; HHNW Source, Federal Reserve System, Z.1 Financial Accounts – *2014 SMI, Medicare, SS unfunded liability authors estimate.
The below chart shows while the % of American’s 65 and older is now up to 14% and rapidly rising, apparently the future when the 65+ population is significantly larger and the working age population smaller will be a better time to repay these spiraling debts and obligations?!?  Here is a breakdown of each column:
  1. % of 65+ year old US population
  2. (Treasury) Debt to GDP – size of outstanding public debt (bills, notes, bonds) vs. all annual economic activity.
  3. (Treasury) Debt to Tax Revenue - In order to pay off our Treasury debt starting today, it would take six years of all federal tax revenue paying nothing but Treasury holders to clean the sheet…
  4. Total Debt to GDP - In order to pay off all Treasury debt and fund all future unfunded obligations (filling the anticipated gap between future tax revenues and future payouts) would require the government to collect all US economic activity for 6 years (or in essence a 100% tax on every movement within the economy for 6 years).
  5. Total Debt to Tax Revenue – All debt and unfunded obligations vs annual federal tax revenue…yup, it would take 35 years at current federal tax revenue collection pace, spent on nothing but paying off debt and funding all of America’s promises while undertaking no spending (no SS, Medicare, no military, no welfare…nothing for 35 years).

Of course, debt isn’t necessarily bad…it’s only bad when it’s undertaken without the intent of repaying and the suppression of interest rates becomes a national security risk to mask bankruptcy!  But America has no interest or intention of paying off or even paying down its debts…apparently ever.  America chose this course in back to back actions in the 1969 transition to a Unified Budget and then the 1971 dismissal of the Bretton Woods Accord and closure of dollar convertibility to gold.  America would forever more only make interest payments on an ever larger debt load and its currency would continue to be utilized thanks to the Petro-Dollar agreement with Saudi Arabia and OPEC.  So, ever more debt and no concern the currency would be rejected.  The only thing necessary was an enabler to suppress interest rates.  And voila…enter the ultimate enabler…the Federal Reserve and central banks around the world.  That interest costs would be perpetually lower to allow ever more debt was a done deal.  And below is the ramping US debt minus the ramping interest costs that many anticipated alongside the debt…
Federal Debt Source, Dept. of Treasury

The Federal Reserve’s enabling destroyed the American government’s primary role of compromising between spending and taxation.  Instead, America’s representatives quickly caught on they could spend more and tax less running gargantuan deficits seemingly without implication.  And a snapshot of federal government receipts (taxes) and outlays (spending) below.

Source; www.US Government
And the rapidly rising spending (below) absent the rise in tax receipts to pay for that spending.

Source; www.US Government

The next chart is the fiscal year 2013 GAO (Government Accounting Office) breakdown of Medicare and Social Security spending (slightly different than above due to fiscal vs. calendar year #’s).  What should be noted in the below are the deficits highlighted in yellow.  In FY’13, SS and Medicare (collectively) ran a budget deficit of $366 billion (expenditures greater than tax revenues).  However, this is masked by “transfers” into Medicare & “interest credits” to Social Security (interest paid via US tax revenue on Government Account Series securities held by the trust funds).  The intra-governmental debt was incurred when the federal government borrowed from these federal trust funds to help fund current operations (see Unified budget).  So we borrowed the trust fund surplus, spent it, and now pay ourselves interest on debt we owe ourselves…and we count this interest (taxes from ourselves) as revenue?!?  The Medicare and SS budget deficits are set to blast off as the numbers of boomers drawing from these rapidly escalate.
Table 1
Revenues and Expenditures for Medicare and Social Security…
Trust Funds and the Total Federal Budget for the Fiscal Year ended September 30, 2013
Trust Funds
(In billions of dollars)
All Other
Total 1
Payroll taxes and other public revenues:
Payroll and benefit taxes…………
Other taxes and fees……………
Total expenditures to the public 2
Net results—budget perspective 3
Revenues from other Government accounts:
Interest credits……………………
Net results—trust fund perspective: 3
1 This column is the sum of the preceding two columns and shows data for the total Federal budget. The figure $680.3 was the total Federal deficit in fiscal year 2013.
2 The OASDI figure includes $4.5 billion transferred to the Railroad Retirement Board for benefit payments and is therefore an expenditure to the public.
3 Net results are computed as revenues less expenditures.
Notes: Amounts may not add due to rounding.
“N/A” indicates not applicable.

Source; GAO, U.S. Government’s Fiscal Years 2013 and 2012 Consolidated Financial Statements
Social Security - As the chart below shows, Social Security has become the default retirement plan for the majority of America’s rapidly retiring boomers (their homes provide no income and relatively few have savings or other income producing assets).

But, as the next chart below highlights, the Social Security DI (Disability Insurance) fund (the smaller portion of Social Security) will be depleted in 2016 and run deficits of $30 to $50 billion annually thereafter, assuming Congress allocates the money.

And as the below chart indicates (under the rosy assumptions that no economic slowdowns or recessions will take place over the next decade), the much larger general OASI (Old Age & Survivors Insurance) trust fund will soon run into deficits and be depleted by 2030.
“(CRFB) Over the coming decade, Social Security spending will climb steadily (6 percent on average per year) due to the nation’s growing elderly population and rising benefits. Under current law assumptions, Social Security outlays will encompass 5.6 percent of GDP by 2024. CBO’s analysis shows that in the near future, both Disability Insurance and Old Age and Survivors Insurance will face major funding challenges and will need to be addressed.”

Source; Committee for Responsible Federal Budget

Medicare – Intended for those 65+ years old along with those who are younger with disabilities.  Medicare pays for about half the medical costs for enrollees and now serves nearly 60 million enrollees and escalating rapidly over the next decade far in advance of revenues to pay for it.

Student Loans - The chart below shows that student loan debt is skyrocketing in the 15-24 set, household formation is slowing and being delayed until much later resulting in shrinking family size and first time home buyers on the decline.
    • 15-24 year old population segment isn’t growing, college graduates are highly indebted from school and job quality and wage growth prospects to repay debt are poor.
    • 2/3rds college students borrow money for school and the average debt is now $35k…37 million have student debt and the amount now well exceeds credit card debt.
Source; Federal Reserve System, G.19 Consumer Credit
Prison - It’s probably also worth mentioning America has approx. 2.3 million adults in jail or prison or about 1% of the US adult population…btw, the US has about a quarter of the world total of incarcerated persons despite having only about 4% of the world’s population!?!