“This week, the federal government published two important reports on long-term budgetary trends. …
The first report is from the trustees of the Social Security system. News reports emphasized that the date when its trust fund will be exhausted is now four years earlier than estimated last year. But in truth, this is an utterly meaningless fact because the trust fund itself is economically meaningless.
…
Most Americans believe that the Social Security trust fund contains a pot of money that is sitting somewhere earning interest to pay their benefits when they retire. On paper this is true; somewhere in a Treasury Department ledger there are $2.4 trillion worth of assets labeled "Social Security trust fund."
The problem is that by law 100% of these "assets" are invested in Treasury securities. Therefore, the trust fund does not have any actual resources with which to pay Social Security benefits. It's as if you wrote an IOU to yourself; no matter how large the IOU is it doesn't increase your net worth.
…
The trust fund is better thought of as budget authority giving the federal government legal permission to use general revenues to pay Social Security benefits when current Social Security taxes are insufficient to pay current benefits--something that will happen in 2016. …
What really matters is not how much money is in the Social Security trust fund or when it is exhausted, but how much Social Security benefits have been promised and how much total revenue the government will need to pay them.
The answer to this question can be found on page 63 of the trustees report. It says that the payroll tax rate would have to rise 1.9% immediately and permanently to pay all the benefits that have been promised over the next 75 years for Social Security and disability insurance.
But this really understates the problem because there are many people alive today who will be drawing Social Security benefits more than 75 years from now. Economists generally believe that the appropriate way of calculating the program's long-term cost is to do so in perpetuity, adjusted for the rate of interest, something called discounting or present value.
Social Security's actuaries make such a calculation on page 64. It says that Social Security's unfunded liability in perpetuity is $17.5 trillion (treating the trust fund as meaningless). The program would need that much money today in a real trust fund outside the government earning a true return to pay for all the benefits that have been promised over and above future Social Security taxes. …
To put it another way, Social Security's unfunded liability equals 1.3% of the gross domestic product. …
As bad as that is, however, Social Security's problems are trivial compared to Medicare's. Its trustees also issued a report this week. On page 69 we see that just part A of that program, which pays for hospital care, has an unfunded liability of $36.4 trillion in perpetuity. The payroll tax rate would have to rise by 6.5% immediately to cover that shortfall or 2.8% of GDP forever. …
But this is just the beginning of Medicare's problems, because it also has two other programs: part B, which covers doctor's visits, and part D, which pays for prescription drugs.
The unfunded portion of Medicare part B is already covered by general revenues under current law. The present value of that is $37 trillion or 2.8% of GDP in perpetuity according to the trustees report (p. 111). The unfunded portion of Medicare part D, which was rammed into law by George W. Bush and a Republican Congress in 2003, is also covered by general revenues under current law and has a present value of $15.5 trillion or 1.2% of GDP forever (p. 127).
To summarize, we see that taxpayers are on the hook for Social Security and Medicare by these amounts: Social Security, 1.3% of GDP; Medicare part A, 2.8% of GDP; Medicare part B, 2.8% of GDP; and Medicare part D, 1.2% of GDP. This adds up to 8.1% of GDP. Thus federal income taxes for every taxpayer would have to rise by roughly 81% to pay all of the benefits promised by these programs under current law over and above the payroll tax.
Since many taxpayers have just paid their income taxes for 2008 they may have their federal returns close at hand. They all should look up the total amount they paid and multiply that figure by 1.81 to find out what they should be paying right now to finance Social Security and Medicare.”
http://www.forbes.com/2009/05/14/taxes-social-security-opinions-columnists-medicare_print.html
Bruce Bartlett, “The 81% Tax Increase”, Forbes (15 May 2009).
Bruce Bartlett is a former Treasury Department economist and the author of Reaganomics: Supply-Side Economics in Action and Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy. He writes a weekly column for Forbes magazine.
And to think the 8.1 per cent of GDP increase in the taxes you will have to pay does not include higher costs for Medicaid, the new carbon-based energy taxes now making their way through Congress, Obama’s expected expansion of education, his proposed tax on employer-provided health care insurance, the loss of the charity and other deductions, the increase in the estate tax, interest on the national debt now being accumulated, or other proposed taxes and spending initiatives, such as greatly expanded health insurance subsidies for the poor. And all of this does not include any rise in taxes at the state and local levels.
Nor do we have any idea who will ultimately pay the taxes that finance this great increase in spending. In his tax program, Obama has proposed removing more low-income households off the personal income tax and providing them with a larger “earned income tax credit”, which is a “negative income tax”, or subsidy, to low-wage workers. By reducing the overall tax base and greatly increasing the tax burden on the remaining tax-paying households, taxes across all middle and upper-income groups will rise much more than most people realize.
In fact, looked at realistically there is no way that the tax burden implicit in all of this can actually be carried by middle and upper-income households. It amounts to a program of long-term financial suicide for the vast majority of American families. Add to this financing problems created by the deficits now being generated as a result of the tremendous increase in spending under the recent stimulus package and we have a program of short-term financial suicide for the government.
It is difficult to see how the course Obama has put us on is sustainable over either the short or the longer-term.
A Tdj by Doug Walker.
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