Economics, Taxes and Spending

Did the SuperCommittee see these two horrible debt graphics?

Citigroup send this table out to clients today:

And for those who prefer a 75-year time horizon, there is this chart from the Kleiner Perkins USA Inc. report:

Citi’s bottom line:

When actual austerity is demanded by savers funding budget deficits, the consequences are never pretty. Amid powerful rallies in U.S. bonds in recent years, it may be forgotten that a three percentage point rise in long-term U.S. rates took no longer than six months in 1981. While driven significantly by a policy decision from the Federal Reserve at the time, such a selloff did not take significantly longer than the periods seen in Italy or Spain recently. Such a future selloff may not be an internal policy decision led by the Fed.

Quite simply, if Medicare as we know it and social security are to remain, the taxes collected to finance these programs are woefully short. Social Security already runs an operating deficit. Its assets are U.S. Treasury securities that have not been issued to the public, but will be matched with marketed securities when payments come due, as the public was subtly reminded as the debt ceiling was hit in August.

As figures 1 illustrates, the 6.2% payroll tax, prior to its “one year” cut in 2011, covers roughly one fourth of the present value of total future Medicare and Social Security obligations as extrapolated by Federal actuaries. The unfunded portion of these programs is now valued at $78 trillion through the future. Fully funding these entitlements will require huge program reforms or sharply higher taxes.

4 thoughts on “Did the SuperCommittee see these two horrible debt graphics?

  1. Two “minor” quibbles with the “unfunded liabilities” metric used by the Trustees:

    - It assumes that if we have the cash today, it would be invested in a vehicle that somehow earns 5.8% interest (roughly 3 percentage points above inflation) without further straining the federal treasury.

    - It also assumes the current “Trust Funds” represent actual assets. They don’t; they represent roughly $3 trillion (present value) in additional unfunded liabilities as there isn’t dollar one set aside to monetize them.

    Also, there is a bit of a correction needed on Citi’s bottom line. The total FICA/SECA tax rate going to both Social Security and Medicare Part A is 15.3%; the 6.2% referenced is only the employee share of the part that goes to Social Security. However, that is entirely spoken for, which means that if we were to fully-fund the unfunded liability (while rolling the additional costs of Medicare Parts B and D into the payroll tax rather than using the existing automatic increases in funding), the total FICA/SECA tax rate would need to be somewhere around 15% of total income and, unlike the bulk of the FICA/SECA tax, be applied to the entire income spectrum.

  2. The Democrats never intended for the “super committee” to succeed. That is the reason they put the people on the committee they did. There were always only two purposes for them agreeing to the super committee.

    The first is that it’s inevitable failure would provide them cover for making the Medicare/Medicaid “cuts” that were included, and it gave them the cuts to Defense they have always wanted.

    The second purpose–directly connected to the first–was to provide them with a campaign issue and to enable them to point the finger of blame at Republicans.

    The only thing surprising and/or disappointing about the “super committee” is that the Republicans were so naive or so willfully ignorant and blind that they fell for the trap. The instant I heard of the planned committee and the automatic “cuts” that were imposed to “force the members to make a serious effort to succeed,” I knew that the Republicans had once more caved into the Democrats.

    There is another side to this planned failure as well, it gives those unsteady Republicans the cover they need as well to avoid blame for the “cuts” that are now going to be imposed.

    America needs to return to “zero based budgeting,” to elect more men of courage and character (admittedly easier said than done), and to rid ourselves of this “meddlesome” President next November.

    They are all well aware of the data you posted; they are simply unable or unwilling to deal with the realities that data show. Democrats lack the intellectual courage and the understanding of fiscal realities and Republicans lack the courage to face the negative press should they act.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>