The Social Security Trustees just released their annual report on the system’s finances. The news is awful. Most people know that the system’s future benefit promises are greater than its future payroll tax (FICA) revenues. But how big is the difference — its fiscal gap, also called its unfunded liability?
The answer – a terrifying $59.8 trillion – is buried deep in Appendix table VIF1. That’s over 2.5 times the size of the U.S. economy. Even more disturbing is the change since last year’s report. The system’s debt grew by $6.8 trillion. In other words, Social Security ran a deficit equal to 30 percent of GDP. This is more than twice last year’s $3.1 trillion official deficit. But unlike the change in official debt, Social Security’s deficits are carefully kept off the books — for political, not economic reasons. Consequently, not a single media outlet we know of has reported these numbers.
The cause of Social Security’s massive increase in red ink? It’s not policy. Nothing’s changed there. Instead, it’s less favorable long-run economic and demographic projections. But the source of Social Security’s deficit doesn’t make it any easier to handle. The current Social Security payroll tax is 12.4 percent, levied up to the maximum taxable earnings (now $142,800). Find-it-if-you-can table VIF1 says we need a 4.6 percentage point permanent increase in this rate, raising the Social Security FICA payroll tax to 17 percent, to pay Social Security benefits on an ongoing basis.
Go back to the 2011 Social Security Trustees Report and you’ll find in table IVB6 that the system needed a 3.6 permanent percentage point tax hike to keep paying benefits through time. Hence, by this measure, Social Security’s highly troubled finances have deteriorated by an additional 28 percent in just 10 years.
Unfortunately, Social Security’s fiscal shortfall is just part of our nation’s long-term insolvency. Official debt is now 100 percent of GDP. In 2007 it was 35 percent. Then there’s our out-of-control federal health care spending. The Congressional Budget Office (CBO) estimates that Medicare, the Affordable Care Act and other federal health care outlays will rise from 5.7 percent of GDP to 9.4 percent of GDP over the next 30 years. Paying for just the Medicare part of this problem requires raising our current combined Social Security and Medicare 15.3 percent FICA tax to 22.4 percent today.
Yes, half of the FICA is the employer’s share. But our bosses are lowering our net pay to cover what they need to send Uncle Sam on our behalf. Except for the politically driven bookkeeping, workers pay the entire FICA tax.
One can look at our fiscal debacle program by program. But what really matters is the overall picture. Fortunately, CBO’s long-term fiscal projections can be used to assess Uncle Sam’s overall fiscal gap — the present value of all projected federal outlays, including interest payments on official debt, less the present value of projected federal receipts. Hold your breath: The U.S. fiscal gap exceeds 10 years of GDP.
This figure is based on the government’s preferred, but quite low interest rate for forming present values. With a higher and, arguably, more appropriate rate, the U.S. fiscal gap is dramatically smaller. But so is the present value of the future tax base needed to cover the gap. No matter what interest rate you use, the U.S. needs to immediately and permanently raise every federal tax by at least one third to pay, through time, for what our government plans to spend.
The alternative? Massive spending cuts. And, no, the Federal Reserve can’t make this problem go away by printing the money needed by the Treasury. This would end where it always does — in hyperinflation.
The size of the overall U.S. fiscal gap is unknown to Americans because neither political party wants to officially calculate it. But other countries routinely measure their fiscal gaps. Indeed, the European Union does so every three years in an extensive study of long-term fiscal sustainability. None of the major EU countries has anything close to the sustainability problem we face.
Herb Stein, President Nixon’s chair of the Council of Economic Advisers, famously said, “If something cannot go on forever, it will stop.” When it comes to America’s fiscal affairs, what can’t go on forever will stop too late, leaving our kids paying dramatically more in taxes and receiving dramatically less in benefits. This is fiscal child abuse, pure and simple.
Most people think our country is divided left and right. But that conflict is being hyped by politicians to hide the real war — the fiscal war they, with our adult consent, are waging and winning against our children.