The Really Scary News in the Social Security Trustees Report


Social security administrators have just published their annual report on the system’s finances. The news is horrible. Most people know that the system’s future benefit promises are greater than future payroll tax (FICA) revenues. But how big is the difference – its tax gap, also known as unfunded liability?

The answer – a terrifying $ 59.8 trillion – is buried deep in the table in Annex VIF1. This is more than 2.5 times the size of the US economy. Even more worrying is the change since last year’s report. The system’s debt increased by $ 6.8 trillion. In other words, Social Security recorded a deficit equal to 30% of GDP. This is more than double the official deficit of $ 3.1 trillion last year. But unlike changes in public debt, Social Security deficits are carefully kept off the books – for political, not economic, reasons. Therefore, not a single media outlet to our knowledge has reported these figures.

The cause of the massive increase in social security in red ink? It is not politics. There, nothing has changed. Rather, they are less favorable long-term economic and demographic projections. But the origin of the Social Security deficit does not facilitate its management. The current Social Security payroll tax is 12.4 percent, levied up to the maximum taxable income (now $ 142,800). The Find-it-if-you-can VIF1 table indicates that we need a permanent 4.6 percentage point increase in this rate, bringing the FICA Social Security payroll tax to 17 percent, to pay social security benefits on an ongoing basis.

Go back to the Social Security Trustees Report 2011 and you will see in Table IVB6 that the system needed a permanent tax increase of 3.6 percentage points to keep paying benefits over time. Therefore, according to this measure, the very difficult finances of Social Security deteriorated by an additional 28% in just 10 years.

Unfortunately, the social security budget deficit is only part of our country’s long-term insolvency. Public debt now represents 100% of GDP. In 2007, it was 35%. Then there is 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 spending will grow from 5.7% of GDP to 9.4% of GDP over the next 30 years. Paying only for the Medicare portion of this problem requires increasing our current combined FICA Social Security and Medicare tax from 15.3% to 22.4% today.

Yes, half of the FCIA is the employer’s share. But our bosses are lowering our take home pay to cover what they need to send Uncle Sam on our behalf. With the exception of political accounting, workers pay the entire FICA tax.

We can watch our tax debacle program by program. But what really matters is the overall picture. Fortunately, the CBO’s long-term budget projections can be used to assess Uncle Sam’s overall fiscal gap – the present value of all planned federal spending, including interest payments on the public debt, minus the present value of anticipated federal revenues. Hold your breath: the US fiscal gap exceeds 10 years of GDP.

This figure is based on the government’s preferred, but low enough, interest rate for the formation of current stocks. With a higher and arguably more appropriate rate, the US fiscal gap is considerably smaller. But so does the present value of the future tax base needed to close the gap. No matter what interest rate you use, the United States must immediately and permanently increase every federal tax by at least one-third to pay, over time, what our government plans to spend.

The alternative? Massive spending cuts. And, no, the Federal Reserve cannot make this problem go away by printing the necessary money into the treasury. It would end where it always does – in hyperinflation.

The size of the overall US budget gap is unknown to Americans because none of the political parties want to officially calculate it. But other countries regularly measure their budget gaps. Indeed, the European Union does so every three years in an in-depth study of long-term fiscal sustainability. None of the major EU countries has anything close to the sustainability problem we face.

Herb Stein, chairman of President Nixon’s Council of Economic Advisers, said: “If something can’t go on forever, it will stop. When it comes to American tax affairs, what cannot go on forever will end too late, leaving our children to pay considerably more taxes and receive considerably fewer benefits. It is tax abuse, pure and simple.

Most people think that our country is divided left and right. But this conflict is exaggerated by politicians to hide the real war – the tax war that they, with our adult consent, are waging and winning against our children.

John Goodman is President of the Goodman Institute. He is the author of “New Way to Care: Social Protections That Prior Families First”. Laurence Kotlikoff is professor of economics at Boston University.


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