I was recently part of an interesting discussion about government debt and current debates about how to control it. One side says that we cannot touch Social Security and Medicare spending. Those programs are too politically sensitive. Another side says that it is nearly impossible to control US federal debt without cutting these two important social programs. There are, of course, many other debates about the debt but I thought I would focus on this one today: Can or should we cut future spending on Social Security or Medicare?
First a little story. Then I will get to some data.
Nolan gets a part-time job and finds it impossible to spend all the money he earns each month so he lends the residual to Jason who promises to pay him back in 14 years. Jason spends the money each month. Fourteen years later, when Nolan asks for the money back and shows Jason his spreadsheet of past contributions, Jason agrees that the spreadsheet is impressive and that in fact he now owes Nolan enough money to go to college at Georgia Tech. Unfortunately, since Jason did not invest the money or any other money, he explains to Nolan that he is out of luck. Judge Judy saw otherwise and ordered Jason to find a second job so as to pay Nolan back what he owes him.
You might expect by now that Jason is going to shoot me. But this is not about Jason or Nolan – it is about the United States of America. Despite receiving very large sums of dollars for about 80 years from people paying into the Social Security system and other so-called trust funds, the US has nothing to show for it. Our government has done nothing but spend more each year than it receives in Social Security taxes and all other taxes. As such, instead of a shovel-ready-saving account the government now has a gigantic debt. Worse yet, all the annual balances of the major trust funds are either already in the red or are headed that way (see table below). Despite some funny accounting that shows trust funds with positive balances, there is no lock box and there is no money. It's like Nolan's spreadsheet.
The USA now has to get a second job – or find a clever way to raise our taxes to keep the parade going.
Now to the data. Source is the Congressional Budget Office
The bottom of the table below shows projections of annual flows into and out of major US government trust funds. These projections are based on existing legislation. Notice that in four short years (2021) they will begin spending more than they take in each year. In 10 years, they will have combined deficits of almost half a trillion dollars each year hence. Notice that Social Security and Medicare explain all of the problem with trust funds -- with Social Security going into deficit by 2019. Medicare is already showing annual deficits. And yes, these deficits must be paid out of the general budget each year. That means more debt.
The table also shows that the national debt held by the public (the gross debt is even larger) is going to increase by $3.5 trillion or 25% in the next five years. The annual rate of federal government spending will also increase by 25% or by close to $1 trillion per year in those five years.
Notice that if spending control is to be used to slow or reduce the nation's debt, the choices are limited to make a noticeable impact. Nine of the 10 spending categories listed below will increase between 2016 and 2021. But the expenditure increases are small for all of those except for three. The increase in defense spending is expected to be $58 billion; for income security the rise is $19 billion. Compare those amounts to the much bigger increases for Social Security ($281 billion), Medicare ($220 billion), and Net Interest ($194 billion). Since the latter is unavoidable, we are left with only two real opportunities to make a dent in spending and the debt.
No one wants to push old people over cliffs. But if one is sincere about managing the country's debt load, the choices are pretty limited. And notice again, we are not talking about cuts in any program. The annual amounts of spending for Social Security and Medicare combined will increase by half a trillion dollars per year by 2021. That's a whopping per year 31% increase in Social Security spending and 32% per year for Medicare. Don't tell me there isn't room to cut before it starts to hurt grandpa.
|10 Year Budget Projections|
|(in billions of dollars)||2016||2021||Change||% of Total|
|Held by the Public|
|(in trillions of dollars)|
|Trust Fund Annual|
|Deficits and Surpluses|
|In billions of dollars|
|All Trust Funds||314||72||-20||-454|
*Children's Health Insurance Program