A San Francisco Fed report highlights concern over Congressional spending that’s out of control, Social Security, Medicare, and rising interest on the national debt.
The U.S. federal debt is now roughly as large as the country’s annual GDP. A high and rising ratio of debt to GDP not only raises government borrowing costs but also risks pushing up long-run interest rates, which in turn can reduce investment and economic growth. The last time the debt as a share of GDP was this large was in 1945–1946, at the end of World War II (WWII). Over the following three decades, the debt-to-GDP ratio steadily fell, reaching roughly 25% by 1975. That 30-year decline contrasts sharply with the projected 30-year increase in the debt-to-GDP ratio, reaching 172%, over 2024 to 2054, according to the latest current Congressional Budget Office projections (see CBO 2024).
The Debt-to-GDP Ratio: Lessons from World War II
There are two strong parallels between the current era and the WWII era when it comes to the federal debt. The first parallel is the sharp run-up in the primary deficit. Figure 1 shows that the primary deficit skyrocketed between 1941 and 1945, driven mainly by defense spending, reaching a peak of nearly 30% of GDP in fiscal year 1943. The primary deficit also increased sharply during the pandemic, reaching around 12% of GDP in both 2020 and 2021. Moreover, it already had increased substantially during and right after the Great Recession. Indeed, the cumulative increase in the primary deficit as a share of GDP from 2008 to 2021 was almost three-fourths the size of the cumulative increase from 1940 to 1946.
With a near-zero primary deficit, the direction of the debt-to-GDP ratio is determined by the second component, which is the debt-to-GDP ratio times the difference between the interest rate paid on debt and the rate of economic growth. This component was generally negative between 1945 and 1975, pushing down the debt-to-GDP ratio.
In sum, the United States was able to reduce its post-WWII debt ratio from a historic high of over 100% in 1946 to a historic low of roughly 25% in 1975 by a combination of a balanced primary budget and economic growth that surpassed the interest rate on debt.
Current Long-Run Fiscal Outlook
In the near term, the primary deficit is projected to shrink modestly due to the projection’s assumptions that the post-pandemic economic recovery will continue and that certain tax provisions from the 2017 Tax Cuts and Jobs Act will be allowed to expire as scheduled.
However, over the long run, the primary deficit is projected to increase gradually until the early 2040s before plateauing around 2.7% of GDP.
The main source of the long-run upward pressure on the primary deficit is spending on mandatory programs such as Social Security and Medicare. Current legislated formulas used to determine spending per recipient for Social Security benefits and government health-care programs, especially Medicare, combined with the projected aging of the population, point to large increases in spending for these programs as a share of GDP. This pressure was absent after WWII because the overall U.S. population was younger and because Medicare was not enacted until 1965.
Balancing the primary budget, which was a key factor in the decline of the debt-to-GDP ratio after WWII, would be likely to require major reforms to spending programs or large increases in tax revenue.
The long-run rates of GDP growth and interest are the subject of active empirical research and careful consideration by policymakers. For instance, four times a year Federal Open Market Committee participants provide their forecast for each of these rates in the Summary of Economic Projections (SEP).
As shown by the green shading in Figure 1 [second chart above], the CBO projects interest costs to grow as a share of GDP over the next 30 years. Two assessments underlie the CBO projections. First, investors in U.S. debt, expecting persistently high levels of borrowing from the government, would require relatively high interest rates to compensate for potential risk. And, second, those high interest rates increase borrowing costs for businesses, which discourages investment. Lower investment, in turn, could lead to slower growth for productivity and GDP.
Conclusion
Without major reforms to mandatory spending programs such as Social Security and Medicare, or large tax increases, the primary deficit is expected to persist. This leaves the rate of economic growth relative to interest rates as the crucial factor determining the path of the debt-to-GDP ratio over the next few decades. Current projections of GDP growth are relatively low—lower than after WWII. However, new technological advances, such as artificial intelligence, could fuel a productivity-led boost to long-run economic growth. Events abroad could also increase the foreign demand for U.S. Treasury notes as a safe asset, helping to stave off projected increases in long-run U.S. interest rates.
Mish Synopsis
The current setup is nothing like the situation following WWII. Don’t expect another baby boom.
Instead, expect a massive wave of boomer retirements (already started) that will pressure Medicare and Social Security.
Depending on the kindness of foreigners to increase demand for US treasuries is not exactly a great plan.
Artificial Intelligence (AI) will undoubtedly increase productivity. But that is not going to offset the willingness of Congress to spend more and more money on wars, defense, foreign aid, child tax credits, free education, and other free money handouts, while trying to be the world’s policeman.
The Fed is right to be concerned. It tried to list a couple of ways the problem is lessened, but counting on AI to be the savior seems far fetched.
“Under no circumstances should Republicans vote to cut a single penny from Medicare or Social Security,” Trump said in a two-minute video message posted to social media that could test his influence among Republicans who now control the U.S. House of Representatives.
Social Security, which provides retirement and disability payments, accounted for 17% of federal spending in the 2021 fiscal year, while Medicare, the health-insurance program for seniors, accounted for 13%, according to the Congressional Budget Office. Both programs are projected to grow dramatically in coming years due to an aging population.
“Their plan would cut Social Security benefits,” Biden said Nov. 27 during a White House event. “I thought (Republicans) agreed not to do this a couple times. But they’re back at it. Average benefit cut would be 13%.”
The Cost of Doing Nothing
Biden’s claim was based on a 2020 report that Trump did not embrace. Both Trump and Biden have stated they will not touch Social Security.
Joe Biden and Donald Trump agree on one thing. “I guarantee you I will protect Social Security and Medicare without any change. Guaranteed,” Mr. Biden said in March. Mr. Trump has said: “I will do everything within my power not to touch Social Security, to leave it the way it is.”
Doing nothing won’t protect beneficiaries. It’ll subject them to automatic 23% cuts in 10 years.
Under existing law, doing nothing will result in automatic cuts of 23 percent based on CBO estimates.
But presidents cannot think past the current election cycle. It’s debatable if Biden can think at all.
Rosy Estimates
The CBO Estimates are too rosy. No one has bothered to factor in a recession as far as the eye can see.
Even without a recession, payroll data tells one story and employment another.
Nonfarm payrolls and employment levels from the BLS, chart by Mish.
For 9 years, between 1942-1951, President Roosevelt’s Treasury and the Fed committed to a low interest rate “peg” of .37 percent on short-term rates and capped long-term rates at 2.5 percent. The goal of the peg was to stabilize securities and allow the federal government to engage in cheaper debt financing of World War II.
The peg was designed to halt an increase in interest rates, from an inflation spiral, that accompanies currency devaluation. A rise in rates would stop the recovery, as happened in the late 1930s, and 1970s.
Cumulative inflation during the 1940s decade was 68 percent. In 1951 the yearly CPI reached 21 percent.
Obama’s essay, “The way ahead”, published in the “Economist”, October 2016, Obama wrote: “I enacted a larger and more front-loaded fiscal stimulus than even President Roosevelt’s New Deal and oversaw the most comprehensive rewriting of the rules of the financial system since the 1930s.”
During Obama’s 8 year term, the average FFR was 0.34 percent. The 10-year Treasury rate averaged 2.48 percent. Identical to Roosevelt’s peg.
Obama avoided the socialist decree of pegged rates, when the BLS’ measured rate of inflation was engineered to 2 percent. This allowed historically low Treasury rates of the 1940s, while it avoided the 68 percent published rate of inflation. The BLS disguised that average home prices inflated by 50 percent during Obama’s 2 terms.
Low rates of the peg ended in 1951, and didn’t return until 57 years later with the Obama presidency. The current Fed broke new ground when they lowered rates again in response to the pandemic. While BLS continues to gerrymander the measure of inflation.
Stuki Moi
2 months ago
“Artificial Intelligence (AI) will undoubtedly increase productivity.”
As it has done every single year since the late 50s…. At first, rapidly; then slower and slower as time goes by and more and more low hanging fruit has already been picked.
Garry
2 months ago
I’m a financial advisor and one of the folks who actually read the annual Trustees Report for SS. At 67 I’ve lived through politics of one tax cut after another for corporations and the morbidly rich. Eliminate the last 2 tax cut bills and raise FICA taxes a little each year but as an Independent voter I pledge to NEVER vote for any politician who votes to cut one dime from SS or raise their FRA above where it currently is for SS.
Jan de Jong
2 months ago
Maybe stop pushing for wars and halve the “defense” budget. That would save half a trillion. Also, it would free a lot of folk to do something more useful.
The only rationale major candidate in RFKJR. His positions on foreign adventurism seem to align with the Libertarian Party.
JeffD
2 months ago
Social Security could be fixed overnight, since it is very close to being in balance, despite the scare mongering. Medicare is the problem, and it is unfixable. I wish people would stop lumping these two very different programs together.
Commonsense
2 months ago
Several tax cuts for the already wealthy of the last half century is the bigger contributor to our astronomical debt and deficit..
Since ’71; taxes have largely been irrelevant. All meaningfully large government wealth transfers are easier done; hence are done; via debasement, ever since then. The ones on the “transferred too” side of the ledger, have been government (hence massive spending funded by freshprint); and, as you allude to, the already wealthy.
The silly superstition that cuts to _income_ taxes are somehow a meaningful contributor to wealth transfers to the idle, connected rich; is just another trivially obvious fallacy of the naive political Left: People who are rich, and are getting richer, in financialized dystopias; are all far too stupid to earn much income at all; EXCEPT “income” obtained directly as a cut of the source of all financialized-dystopia wealth gains: Debasement, with the attendant preferential credit availability for the connected idles, and asset pumping transferring wealth by way of, always unearned, gains to the same idles.
In Mises’ time, when money was still Gold and mass transfers via debasement hence not so readily available; taxes did no doubt play a meaningful role. But that is no more relevant to the workings of contemporary financialized dystopias, than Mises era abacus’ are to contemporary computing.
Today: All income taxes, like all sales taxes; are taxes on the “poor.” Trivially so: Since only the poor do any work. While the rich, OTOH, get richer simply by sitting there being stupid, while The Fed and government robs more useful beings for their benefit.
RonJ
2 months ago
“The current setup is nothing like the situation following WWII. Don’t expect another baby boom.”
Apparently, Steve Gates wants a 10-15% reduction in the global population, so i don’t understand why he is pushing vaccines, which are supposed to save lives, preventing population reduction. A case of Bubonic plague showed up in Oregon. It is deadly if not treated. Health authorities are rushing to make sure it doesn’t spread.
“Without major reforms to mandatory spending programs such as Social Security and Medicare…”
Human nature says such is a political third rail politicians won’t touch. Human nature never changes. As with the laws of physics, a body in motion stays in motion until acted on by another force. The Covid hospital protocols put an iatrogenic dent in the elderly population, thus pushing spending timelines back a bit.
Avery2
2 months ago
Did Powell stumble across his 4th grade arithmetic book in a box in his garage?
Sunriver
2 months ago
Senate is trying to spend more money we don’t have.
Oh well, what is $95 billion nowadays?
Lunch money.
FromBrussels
2 months ago
NO WORRIES folks , WW3 will sort out ALL current problems soon ! We are busily working on it , so, RELAX !
George t
2 months ago
Massive massive problem. This has to be a joint effort among the fed, congress and president. Pipe dream I know. The pb is shortly hitting the fan.
Reminds me of the movie Logan’s Run. If i recall, they only got to live to age 30. At least they didn’t have the problem of not trusting anyone over 30, as was a slogan in the U.S. at one time.
Last edited 2 months ago by RonJ
Spencer
2 months ago
Debt-to-GDP ratios are obviously contrived metrics. Unprecedented large deficits “absorb” a disproportionately large share of N-gdp (as gov’t spending is a component / factor of gDp). To appraise the effect of the federal budget deficit on interest rates, it is necessary to compare the deficit, not to the debt to a GDP-ratio (a contrived figure), but to the volume of current net private savings made available to the credit markets.
And even then; you’re wildly underestimating, since you are not accounting for the share of private savings stemming from income earned from activities which only exist in the first place, due to deficit spending…..: In a country where every penny earned, were earned by someone getting paid solely to print treasuries; it wouldn’t matter how big a share of his income he saved.
Alex
2 months ago
Thus, we will have financial repression and most in what remains of the middle class will be wiped out. All so a few could make a killing.
I suppose there were a few school shootings and gang killings during their wipeout era….
John Booke
2 months ago
“Doing nothing won’t protect beneficiaries. It’ll subject them to automatic 23% cuts in 10 years.” This statement is completely detached from political reality. In 10 years the government will do what they always do and that is print more money.
“In 10 years the government will do what they always do and that is print more money.”
And hence, by debasement, extract the 23% cuts…..
Zhirayr Nersessian
2 months ago
And not a single mention of the largest outgoing. Debt interest expense
William George Benedict
2 months ago
They have hundreds of billions to give away to pay for the entire government of the Ukraine and the unneeded war. SOCIAL SECURITY basically paid for itself. Medicare and Medicaid are bankrupting the country fast. The entire medical industry is fraudulent from the top to the bottom.
As I like to say, America has the most expensive health care system that money can buy!
Micheal Engel
2 months ago
In Japan the 10Y is 0.7%. In Germany 2.3%. Gravity between the US, Germany and
Japan limits the rise of interest rates. During recessions gov notes and bonds yield decline, but junk rates fly. The cost of interest rate will rise if the US, Germany and Japan will become junk. If MickyD closes 30% of its restaurants we might become healthier. The best way to cut healthcare cost is a campaign against junk food. Tax breaks to the rich can be conditioned to eliminate their SS and medicare. They don’t need gov support. The chart came from SF Fed that failed to supervise Silicon Valley bank, with the most troubled commercial and residential RE in the nation and the highest severance pay.
Adam Tencent
2 months ago
Even if we got rid of SS and went pure capitalism. How in a capitalist system where old people lose the ability work, … ugh survive?
Those guys may be A problem. But neither of their problematicness comes even close to rising above the noise floor.
Debasement; The Fed; is the problem which matters. They are what enables both trillion dollar deficits, and the massive wealth transfers which have left America no better a country to be born in than Argentina. The rest is just nonsense which the gullible, captive indoctrinati is being told to be all up in arms about; in order to distract the dupes from the only real story: Debasement theft.
In our system it takes two institutions to commit the crime. The government spending beyond “its” means, and the Central bank (The Fed) that prints money, buy government bonds and monetizes that spending. … which causes inflation.
It doesn’t take much to exceed the economy’s ability to withstand such abuse, followed by impoverishment of the population.
steve
2 months ago
As long as they can inflate faster than the debt grows they’re happy.
KGB
2 months ago
The Fed can stop spending any time it stops purchasing worthless US Treasury bonds. Dead Stop.
The elephant in the room. Should be renamed “offense” budget. The first item that should be cut IMO. But not even Trump would be willing to make much of a dent in that.
Come on now, those $13 billion aircraft carriers and those $8 billion attack submarines aren’t going to pay for themselves!
Jeffrey Kassel
2 months ago
The numbers don’t work anymore in America which is why we’re getting multi-trillion dollar deficits in the future. Last year wasn’t great either. Debt matters and countries do go bust. America’s national debt is one of the worst on the planet. We’ve been living on borrowed time and borrowed money. We have a stock bubble, a house bubble and a debt bubble. Bubbles always burst. The entitlement problem can be solved with higher taxes on working people. The shortfall is not that big yet, but it will get bigger. Our democracy is now failing and it’s being papered over with more and more debt. When that debt bubble bursts, we’ll be looking at a period like the 1930s. The dollar is losing buying power which is why housing costs so much. The debt bubble has been increasing for 45 years, but it’s not accelerating. And it’s not just federal debt. Total debt as a % of GDP is at an all-time high. The debt bubble burst around 1929 and resulted in the Great Depression which was largely a debt liquidation through bankruptcies, failed banks and failed businesses. We’re coming close to a similar bust.
Jojo
2 months ago
“But presidents cannot think past the current election cycle. It’s debatable if Biden can think at all.“
Bad Mish! The latter sentence was uncalled for. It’s equivalent to what Hur did.
Biden says he’s recently been consulting with Helmut Kohl and Francois Mitterrand, dead for 7 and 28 years respectively. That’s the “thinking” Biden is capable of.
The US has been cruising for a fiscal bruising since Trump took office. Now, because the country is completely polarized between electing one of two geezers, no rational debate about fiscal adjustment is possible. As Rudi Dornbusch liked to say, a fiscal crisis takes longer to happen than you think it will, and then the crisis happens much faster than you thought it could.
hmk
2 months ago
Well maybe they can go back and force seniors to take the covid vaccine. Problem solved medicare and ss will see a sharp drop in enrollement. Or perhaps another man made virus that will selectively infect seniors. All sounds a bit conspiracy theory paranoia? I would put nothing past those useless maleovent bastards.
babelthuap
2 months ago
I’m done with this clown town national debt. Keep spending. It’s not like I have a choice with elections that have never been fully audited and can’t be fully audited. Cheat, print and bomb away.
It might work out for a couple more decades. All I really need to be honest and I’m outta here so keep doing whatever. I would prefer to plan long term but those days are long long gone. Politicians see no further than two feet in front of their face. It’s going to be a musical chairs situation in 20 years or less. Somebody is going to be left holding the bag that’s for damn sure.
shamrockva
2 months ago
How can social security and medicare contribute to future deficits when by law if revenue doesn’t match “promised payments” then the promised payments will be reduced? These projections should be made based on current law, not some illegal idea that we would borrow to pay for social security.
That’s a good point. The CBO does fiscal projections assuming no automatic cuts and automatic cuts. The legal details about how those cuts would happen are pretty murky (SS recipients would remain legally entitled to full benefits). But in any case, only a suicidal politician would let automatic cuts happen.
Siliconguy
2 months ago
As Karl Denninger keeps saying (and no one listens) it’s health care.
“Medicare spending grew 5.9% to $944.3 billion in 2022, or 21 percent of total NHE.
Medicaid spending grew 9.6% to $805.7 billion in 2022, or 18 percent of total NHE.”
VA and other federal health care is another $70 billion or so.
But at the same time you don’t have to approve all the latest / greatest (and thus most expensive) treatments for them either since they are at end of life. In other words generic meds only and we stop replacing hips etc once past a certain age and when you are in final 6 months of life / terminal we don’t attempt to put you in hospital or do expensive treatments to prolong you for another 2 weeks and so on.
Something like 80% of your lifetime health care expenditure is spent in the last 8 months of life. That’s what’s got to change. Note: People can freely spend they own money on whatever care they want, just not public money.
Are we a nation of scoundrels that lets some version of Josef Mengele decide who is going to live and who is going to die based on their incomes? I still think we are better than that, but my doubts are increasing.
Some heartless faceless government bureaucrat will be on the death panel. That is how it works in all those national “single payer” systems.
Six000MileYear
2 months ago
The FED is not so concerned that is will keep lending rates high and deposit rates low..
PapaDave
2 months ago
The government is not going to stop borrowing and spending. It does not matter who wins the next election, or the ten elections after that.
Praising and/or voting for Biden or Trump is a fool’s errand and a total waste of time. Thinking that either one of them will make your life any better is a mirage.
The only person who can make your life better is YOU.
Spend more time on improving your life and less on politics.
Read ‘Candide’ by Voltaire, stop believing Pangloss, and tend to your garden.
Sam R
2 months ago
So no mention of any any other government program that is contributing to record deficits? It’s only SS and Medicare? I am confused. The current deficit (not the long term one) has almost no relevance to Social Security. The problem with Social Security at the moment is that it produces no surplus. It has a dedicated source of revenue; for many, the benefit is taxed and Medicare costs contribution costs are deducted from SS. So SS has nil impact on the current deficit and while it was a known known that demographics would factor into a 30 year structural SS trending downward, we had several tax cuts. SS is easily fixable if you want it to be net neutral as far as the national debt and deficits are concerned. Increase the contribution, reduce colas, increase full retirement age, make it all taxable etc. Congress has to first decide if it wants SS to be deficit neutral or produce structural surpluses. They have done neither. But really now, do
We really have a problem with popular program that has a dedicated revenue source and is taxable that can’t be fixed? No mention of our defense budget that is out of control, both on budget and off budget. No mention of military pensions. No mention of the VA. It’s only SS and Medicare that is the source of the deficit problem? I don’t think the math backs that up!
You’re right. There are lots of reasons we have $34.17 trillion in federal debt, and that’s going to $50 or $60 trillion in ten years. This country has terrible leadership. The numbers are depressing. The country is hollowed out by record debt. Interest on the federal debt is now over $1 trillion a year and rising fast. It’s more than Medicare and Defense but less than SS, which is mostly paid for with SS taxes.
Congress has spent the accumulated SS surpluses. The “lock box” is just a legal federal trust fund accounting construct that says the Treasury borrowed money from SS and needs to pay it back. You often hear this I.O.U. referred to as being backed by “Treasury Bonds.” That of course is a myth too. The bonds issued by treasury are called “special purpose bonds” and they have no value, are not marketable, are not tradable. They are not public debt. They are, however, “intra government” debt which is simply one branch of the federal government owing money to another branch. Interesting too that our neighbors to the north, Canada, has an entity called the Canadian Pension Plan Investment Board that invests SS receipts. They invest in global companies including American companies, infrastructure funds and on it goes. I fail to see why we approach SS in such a limited and irresponsible way. There are numerous approaches and solutions out there!
Because those special purpose bonds aren’t traded, they don’t lose value. The Canadian Pension plan looks great when the stock market is going up but if it goes sideways or down then that plan will suddenly look very insolvent.
The other problem is the US is SO big compared to the Canadian one that if they actually had invested that money in the market they’d have ended up owning literally every company which ironically means you would be technically a socialist / communist country.
What you are saying is that everyone that has an IRA, a ROTH etc is a fool because the stock market can go down. Of course it can do down. But over time……? Is it any worse than a SS Trust Fund that has to borrow to pay back borrowed money? I don’t see the Canadian plan telling its participants that in 10 years they face a 20-25% hair cut. It’s also not all or nothing. SS could also hold cash and it could invest in Treasury Bonds. In fact, per the SS website, that is what we actually did. But the Treasury bond program was suspended. A diversified portfolio of investments, even for a big country, is not the road to socialism. That argument would imply that every country with a Sovereign Wealth Fund is socialist/communist. That would be an incorrect assumption.
Let me ask you which you would prefer to have. An IRA/Roth/401K or a guaranteed government pension? The former means you have to actively manage it (you or someone you pay), that the amount of money you have at retirement can vary widely (based on how your investments perform) and you might run out before you die. The latter means you can sleep at night and never worry about what’s going on in the market because your pension is going to pay X amount per month until you die. Most people want the latter which is why those on government pensions (teachers, cops etc) are living the high life.
That’s the difference between Canada and the US. Canada has the equivalent of the 401K and the US has the equivalent of the guaranteed pension even if that pension means you aren’t living as well as someone who did very well on their 401K but you are living better than those who didn’t. Also, Canada can’t tell anyone they are getting a haircut in 20-25 years because they don’t know until they get there because no one knows what the market will be between now and then so it’s possible they may in fact take that haircut.
As for buying up everything, look at Calpers. They are just the largest pension fund in the world and yet they’d be dwarfed by social security. Calpers already moves the market up/down if they heavily invest in a company. Imagine what would happen when social security bought half of Apple or Microsoft. Would you want them deciding who the board members are or how to invest in future tech etc? Essentially they’d be SO big they’d dominate the investment of every company. It’s not pure socialism but it’s essentially government owned businesses or at worst a 50/50 partner.
You raise good points and clearly a defined benefit is almost always preferable to a defined contribution. I am not saying that SS should be converted to a defined contribution system. I am saying that SS could be deficit neutral long term doing any number of things including increasing the contribution, lowering colas, increasing over time the FRA. I am also saying that if SS were structured so that it continued to produce structural surpluses, those surpluses could be invested similar to the Canadian system. I am not suggesting that the entire revenue stream be converted
Into an investment pool. I like the defined benefit component. But frankly speaking, my own experiences with defined contribution programs has been quite positive. I just
annuitized one bucket of defined contribution proceeds. It’s a reminder too that defined benefit programs have a cost. I think we can and should fix the structural gap while we still have time. It’s doable and there are many ways to do it.
wrote “An IRA/Roth/401K or a guaranteed government pension?”
All else being equal, everyone would choose a “guaranteed government pension”. And that is what government unionized employees choose, because they have the political clout to make the rest of us pay their pensions.
As for the rest of us, a government pension has two problems. 1 it is usually underfunded and can’t pay the promised benefits. This causes sleepless nights for the benefits managers. 2. For the same reason government pensions pay less than a well invested 401k. Because the manager is a poor in-the-mean-time investor compared to a typical manager at Vanguard, much less a John Bogle or Peter Lynch.
Yes, its all smoke and mirrors. There is no trust fund, ss taxes are just another tax and surplus/defict etc are accounting gimmicks. In short, the programs are Ponzi schemes with an expiration date-soon. Making good on ss and health commitments means crowding out other programs, like government wars. It will be interesting but in the near future the can will be kicked.
It’s not a Ponzi scheme largely because ponzi
schemes are illegal. SS as we know it today is legal as is the federal trust fund accounting methodology. But you are correct in that SS has ponzi like attributes. The house of cards, so to speak, rears its head when the program no longer produces annual structural surpluses. But it’s so fixable and easily fixable. But you are right, Congress will kick the can.
Because mandatory spending (SSI and medicare/medicaid) are the elephants in the room. You could eliminate all discretionary spending and still not balance the budget. That’s how bad the situation is. Eliminate SSI and Medicare/Medicaid and there’s more than enough coming into the coffers of the Treasury to fund the govenrment and pay down the debt. You can’t fix the debt problem without address the elephants in the room.
Defense Spending, Military Pensions and Veteran Affairs need to be added to the elephants in the room issue. It may not be in the discretionary category but it keeps increasing every year anyway. Also note, Military Pensions and the VA are not part of the Dept of Defense line item budget. They are separate line items. Together with Dept of Defense budget, you are over 1 trillion a year in expense. I think this qualifies for elephant in the room status!
Dept. of Defense spending is discretionary spending. It can be cut. It can be cut all the way to zero. This would have effects on our foreign relations, some good, many bad.
The interest/revenue problem is as bad already as 1982 (that is, AFTER the 1970s), except today we lack any headroom on debt/GDP.
Back in 1982 the fiscal conservatives called out profligates as “tax-and-spend”. There was enough public shaming that deficit spending was held in check. But in the 2000s the meme morphed to “borrow-and-spend”. Nowadays they just “print-and-spend”.
But debt/GDP says there’s no more ability to borrow our way out of this. Like Wile E. Coyote, we’re already off the edge of the cliff, facing a sudden plunge.
Exactly, at some point no one will lend the US money. I’m shocked that the 10-year bond is only paying 4%. That’s not much considering the debt load and risk.
Put it under the mattress and lose 5+ percent a year to inflation
Put it in the stock market and risk a downturn
People nearing or at retirement age can’t take big risks and so are happy to get 4%.
Note: Before someone says ‘gold/silver’, just remember there isn’t enough gold/silver to go around for everyone to do that and it’s not practical to have a bunch of gold and silver coins under your mattress.
There are many alternatives to owning US Federal debt, besides “mattress cash” and “risky stocks”. Even beyond “gold/silver” and “bit****”. One can start by lending to banks or others outside the government sector. One can buy productive real estate. One might use savings to create or buy a business – not all are vulnerable to market crashes. More traditionally, one might invest in children or grandchildren (e,g. paying for education), with the understanding that they will help support their elders later on. If one is willing to make the effort, there are plenty of ways to create and store value without “enabling” wasteful government spending by buying the debt.
Things haven’t gotten to the it’s-really-bad stage yet. But all those rich buying housing in Vancouver, Canada, and farmland, etc. is intended as an inflation hedge, not as an investment that benefits all of us.
You also had massive annual SS surpluses in the 1980’s that flowed to the Treasury. This “free money” reduced the amount of public debt (bonds) that Treasury had to issue. During the Clinton years you had several years where the budget was said to be balanced. This is a myth. You still had structural “on budget” deficits but Treasury did not have to issue public debt. Why? Because they had hundreds of billions in SS surpluses.
MiTurn
2 months ago
“Artificial Intelligence (AI) will undoubtedly increase productivity.”
We don’t need no freakin’ AI, we got illegals! They’ll boost the economy. I’m sure of it…
AI is going to replace jobs on a scale that’s virtually unimaginable. I have mentioned before that I do some freelance writing as an enjoyable side-hustle… Well, some of my out-of-work counterparts are now thrilled to be teaching/training AI for $20/hour.
Like it or not, there’s soon going to be some sort of basic income scheme in the U.S. for all of the jobs that AI replaced. Either that or we’ll just continue to get rich selling stonks and real estate to each other. Govt spending isn’t going down anytime soon.
Very much agree. And once you are on UBI you’ll be trapped there. Not making enough money to pay for training to get a decent job, and few jobs to go around. I hear alot of people say they will just go into the trades. What’s that going to do tradesmen’s wages when tons of people flood into the trades?
We heard the silly nonsense from silcon valley and politicians that out of work blue collar people can just be retrained. “Learn to code” is what we heard. I’m not aware of any significant retraining efforts. Now alot of those IT people are headed for unemployment. What will they do?
I’m not proposing the governemnt step in, but one has to acknowledge the disruptive nature of AI.
I saw an article that a Waymo self driving car was vandalized and set ablaze in San Francisco the other day. I suspect we will see more of this sort of thing as AI elimates more jobs.
FEMA is still rolling out the covid cash. Just make sure to get covid on a loved one’s death certificate as a contributing factor and you can get up to $9000 cash. Program runs thru Sept 30, 2025. link to fema.gov
But if you survived covid (and the “vaccine”) you continue to pay taxes.
Zo M
2 months ago
Other than Fed, who is going to fund that large deficit, where money will come from? Foreign ownership of the debt has been declining, right?
MikeC711
2 months ago
Anyone who promises to address any of this is unelectable. This scares me greatly. I have seen in microcosms … how most folks no longer possess reasoning skills and far prefer to scream, call names, and threaten. I wish I saw a way to start addressing this … but talk of tax increases or spending cuts makes one unelectable … not pretty.
It’s pretty scary. We have dysfunctional government. We’ve got 80 million people who are retired and or disabled. No one is going to hire them. We’re getting a huge inflation tax. Salaries in grocery stores are going up and that’s reflected in prices. Buying a house is unaffordable now for 75% of the population. The national debt is going to $50-$60 trillion in 10 years and Interest on federal debt is over $1 trillion. It’s the 2nd biggest item in the federal budget. More than defense or Medicare.
Authoritarian regimes are much worse (fiscally). They are bankrupt by definition.
Maximus Minimus
2 months ago
Didn’t the FED create counterfeit money that just flows from the printing presses? No wonder even lesser creates that require no job qualifications, treat it as monopoly.
Last edited 2 months ago by Maximus Minimus
Tim
2 months ago
Did you honestly expect some other outcome? People want what they want. Especially boomers. They’ll bankrupt their own children, then blame them for the national bankruptcy.
I am so glad that I receive SS. I feel badly for my children, who won’t — although they pay into it and are also “promised.” But then, I don’t know what country they’ll be living in by then since the US will have broken up. Maybe the Republic of the Rocky Mountains, or some such legacy state of the former US of A.
What you PAID INTO is nothing compared to the benefits you are going to get and that’s the problem. You don’t need to believe me, just review the history of medicare.
Over the years, more and more “benefits” are being dole out and it’s mathematically impossible for you to have paid into all these benefits if they didn’t exist when you paid for them.
It’s like you paid for a Ford Pinto but are ending up with a Cadillac.
There’s a saying if it’s too good to be true, it’s probably a scam.
The same goes for social security, you paid peanuts and are expecting a full buffet.
I read, since 1991, of pensioners in Russia who receive Soviet Social Security checks. Paid for by Russia, of course. The typical check was about $30/month.
I heard, c.1980, that Soviet pensioners don’t get Soviet SS checks unless they are in the USSR. The person telling me this was dumbfounded that American retirees received SS checks even though they lived in Poland.
You know that there is a difference between PROMISED and actually receive, right? That does happen, particularly in the private sector. The federal PBGC takes over bankrupt private pension funds, and the pension check is typically reduced. In concept Social Security is headed the same direction, and SS checks would deserve to get reduced, too.
People have written that when SS was first implemented, the average person would only collect for 2-5 years before they died. The current life expectancy age in the USA is around 78 years.
Therefore, as someone collecting SS, I am happy to support increasing the SS retirement age to say 72-74 and disabling early collection.
72 is probably too high as most people age 70ish would not be able to do any actual jobs (won’t be hired and even if they were, likely could not physically perform minus a few desk jobs).
Age 62 is WAY too low. 68 should be the minimum age to collect and the age at which you get minimum benefits (the equivalent of collecting at age 62 now). That would rise if you waited to collect until age 70+.
Bismark picked 65 as the pension age as 90 percent of all Germans were dead at 65. If 90 percent of Americans were dead at retirement age, Social Security would be fine.
America is a debt Ponzi, all Ponzis collapse. Congress and Presidents can’t be trusted and we have members of the Supreme Court who are being bribed, or receiving money laundered through salaries of their wives. When bankers from J.P. Morgan and Bank America are complaining about debt, you know something’s seriously screwed up. We had a Great Depression which was basically a liquidation of too much debt. It can happen again.
Nismo
2 months ago
Hi Mish,
I’m wondering what would happen if a US president ditched NATO and left them to the Russian’s. Then Europe in retaliation as a whole decided to stop trading in the USD. The BRICS alliance have already done this. Would it tank the US economy by sending the value of the US$ through the floor?
Should have allowed the Europeans to slaughter themselves in 1917, except the big U.S. banks were already sponsoring it prior to July 1914. Behind any dust-up anywhere in the world there’s a good probability of a Brit hiding behind a bush. BoJo The Clown is only the most recent sociopath.
“it is done.” – Liz Truss text to Blinkin minutes after Nordstream blown up. Putin was too polite to mention that directly to Tucker, but only “surely it was you” part.
Why on Earth would Russia want any part of Europe? NATO exists only as cover for America to boss around its vassals and stir up trouble around the world.
Hank
2 months ago
“The U.S. federal debt is now roughly as large as the country’s annual GDP.”
…..from the SF FED report
Yea their math SUCKS there too. $27T is NOT roughly $34T. In fact the debt is 21% higher than the annual GDP in 2023. I don’t consider 21% “roughly”
Thank a teacher (Union). They were the first to pull the lockdown fire alarm. “If only one life is saved, it is worth it. After all, we are all in this together.”
It’s not just the commercial banking industry. The economies of whole cities and towns are dependent on tax revenues from commercial real estate and almost all local businesses are dependent on the foot traffic that results from commercial buildings being almost fully occupied.
All of this was precipitated by politicians and health officials submitting to raw fear of Covid and ordering the emergency closing of most businesses and people to stay home (“shelter in place”).This resulted in many companies implementing WFH (Work From Home) plans that emptied many commercial buildings.
Once companies recognized that they could successfully run their businesses without having their employees in the same geographic location and employees saw the extra time they gained in their day and their corresponding increase in productivity once commuting was removed from their day, there was no going back.
Politicians are begging companies to return their workers to centralized locations. Their is strong tug of war between politicians, employees and employers over how work is conducted.
Pandora’s box has been opened. It can’t be closed.
For 9 years, between 1942-1951, President Roosevelt’s Treasury and the Fed committed to a low interest rate “peg” of .37 percent on short-term rates and capped long-term rates at 2.5 percent. The goal of the peg was to stabilize securities and allow the federal government to engage in cheaper debt financing of World War II.
The peg was designed to halt an increase in interest rates, from an inflation spiral, that accompanies currency devaluation. A rise in rates would stop the recovery, as happened in the late 1930s, and 1970s.
Cumulative inflation during the 1940s decade was 68 percent. In 1951 the yearly CPI reached 21 percent.
Obama’s essay, “The way ahead”, published in the “Economist”, October 2016, Obama wrote: “I enacted a larger and more front-loaded fiscal stimulus than even President Roosevelt’s New Deal and oversaw the most comprehensive rewriting of the rules of the financial system since the 1930s.”
During Obama’s 8 year term, the average FFR was 0.34 percent. The 10-year Treasury rate averaged 2.48 percent. Identical to Roosevelt’s peg.
Obama avoided the socialist decree of pegged rates, when the BLS’ measured rate of inflation was engineered to 2 percent. This allowed historically low Treasury rates of the 1940s, while it avoided the 68 percent published rate of inflation. The BLS disguised that average home prices inflated by 50 percent during Obama’s 2 terms.
Low rates of the peg ended in 1951, and didn’t return until 57 years later with the Obama presidency. The current Fed broke new ground when they lowered rates again in response to the pandemic. While BLS continues to gerrymander the measure of inflation.
“Artificial Intelligence (AI) will undoubtedly increase productivity.”
As it has done every single year since the late 50s…. At first, rapidly; then slower and slower as time goes by and more and more low hanging fruit has already been picked.
I’m a financial advisor and one of the folks who actually read the annual Trustees Report for SS. At 67 I’ve lived through politics of one tax cut after another for corporations and the morbidly rich. Eliminate the last 2 tax cut bills and raise FICA taxes a little each year but as an Independent voter I pledge to NEVER vote for any politician who votes to cut one dime from SS or raise their FRA above where it currently is for SS.
Maybe stop pushing for wars and halve the “defense” budget. That would save half a trillion. Also, it would free a lot of folk to do something more useful.
The only rationale major candidate in RFKJR. His positions on foreign adventurism seem to align with the Libertarian Party.
Social Security could be fixed overnight, since it is very close to being in balance, despite the scare mongering. Medicare is the problem, and it is unfixable. I wish people would stop lumping these two very different programs together.
Several tax cuts for the already wealthy of the last half century is the bigger contributor to our astronomical debt and deficit..
Since ’71; taxes have largely been irrelevant. All meaningfully large government wealth transfers are easier done; hence are done; via debasement, ever since then. The ones on the “transferred too” side of the ledger, have been government (hence massive spending funded by freshprint); and, as you allude to, the already wealthy.
The silly superstition that cuts to _income_ taxes are somehow a meaningful contributor to wealth transfers to the idle, connected rich; is just another trivially obvious fallacy of the naive political Left: People who are rich, and are getting richer, in financialized dystopias; are all far too stupid to earn much income at all; EXCEPT “income” obtained directly as a cut of the source of all financialized-dystopia wealth gains: Debasement, with the attendant preferential credit availability for the connected idles, and asset pumping transferring wealth by way of, always unearned, gains to the same idles.
In Mises’ time, when money was still Gold and mass transfers via debasement hence not so readily available; taxes did no doubt play a meaningful role. But that is no more relevant to the workings of contemporary financialized dystopias, than Mises era abacus’ are to contemporary computing.
Today: All income taxes, like all sales taxes; are taxes on the “poor.” Trivially so: Since only the poor do any work. While the rich, OTOH, get richer simply by sitting there being stupid, while The Fed and government robs more useful beings for their benefit.
“The current setup is nothing like the situation following WWII. Don’t expect another baby boom.”
Apparently, Steve Gates wants a 10-15% reduction in the global population, so i don’t understand why he is pushing vaccines, which are supposed to save lives, preventing population reduction. A case of Bubonic plague showed up in Oregon. It is deadly if not treated. Health authorities are rushing to make sure it doesn’t spread.
Who the hell is Steve Gates?
“Without major reforms to mandatory spending programs such as Social Security and Medicare…”
Human nature says such is a political third rail politicians won’t touch. Human nature never changes. As with the laws of physics, a body in motion stays in motion until acted on by another force. The Covid hospital protocols put an iatrogenic dent in the elderly population, thus pushing spending timelines back a bit.
Did Powell stumble across his 4th grade arithmetic book in a box in his garage?
Senate is trying to spend more money we don’t have.
Oh well, what is $95 billion nowadays?
Lunch money.
NO WORRIES folks , WW3 will sort out ALL current problems soon ! We are busily working on it , so, RELAX !
Massive massive problem. This has to be a joint effort among the fed, congress and president. Pipe dream I know. The pb is shortly hitting the fan.
“This has to be a joint effort among the fed, congress and president.”
Yup: They need to all hold hands, jump in the Potomac and be gone forever. To be replaced by absolutely nothing at all.
For the FED to sterilize the upcoming monetization of deficits, it will have to go back to legal reserve management.
And the FRB-STL also has the right idea:
link to files.stlouisfed.org
The ONLY answer: PEOPLE of retirement age need to DIE.
Reminds me of the movie Logan’s Run. If i recall, they only got to live to age 30. At least they didn’t have the problem of not trusting anyone over 30, as was a slogan in the U.S. at one time.
Debt-to-GDP ratios are obviously contrived metrics. Unprecedented large deficits “absorb” a disproportionately large share of N-gdp (as gov’t spending is a component / factor of gDp).
To appraise the effect of the federal budget deficit on interest rates, it is necessary to compare the deficit, not to the debt to a GDP-ratio (a contrived figure), but to the volume of current net private savings made available to the credit markets.
And even then; you’re wildly underestimating, since you are not accounting for the share of private savings stemming from income earned from activities which only exist in the first place, due to deficit spending…..: In a country where every penny earned, were earned by someone getting paid solely to print treasuries; it wouldn’t matter how big a share of his income he saved.
Thus, we will have financial repression and most in what remains of the middle class will be wiped out. All so a few could make a killing.
Oh, if the middle class gets wiped out, I foresee a lot of killing.
Well: They already were wiped out.
I suppose there were a few school shootings and gang killings during their wipeout era….
“Doing nothing won’t protect beneficiaries. It’ll subject them to automatic 23% cuts in 10 years.” This statement is completely detached from political reality. In 10 years the government will do what they always do and that is print more money.
“In 10 years the government will do what they always do and that is print more money.”
And hence, by debasement, extract the 23% cuts…..
And not a single mention of the largest outgoing. Debt interest expense
They have hundreds of billions to give away to pay for the entire government of the Ukraine and the unneeded war. SOCIAL SECURITY basically paid for itself. Medicare and Medicaid are bankrupting the country fast. The entire medical industry is fraudulent from the top to the bottom.
As I like to say, America has the most expensive health care system that money can buy!
In Japan the 10Y is 0.7%. In Germany 2.3%. Gravity between the US, Germany and
Japan limits the rise of interest rates. During recessions gov notes and bonds yield decline, but junk rates fly. The cost of interest rate will rise if the US, Germany and Japan will become junk. If MickyD closes 30% of its restaurants we might become healthier. The best way to cut healthcare cost is a campaign against junk food. Tax breaks to the rich can be conditioned to eliminate their SS and medicare. They don’t need gov support. The chart came from SF Fed that failed to supervise Silicon Valley bank, with the most troubled commercial and residential RE in the nation and the highest severance pay.
Even if we got rid of SS and went pure capitalism. How in a capitalist system where old people lose the ability work, … ugh survive?
Why get rid of SS? Sounds like it’s going to self-correct in 10 years anyway!
By that time, we’ll all be owners of our very own Brooklyn Bridge.
Becasue: Like, AI. And, like, stuff!
“How in a capitalist system where old people lose the ability work, … ugh survive?”
Savings.
Those accumulate. Unless they are stolen by debasement, of course.
Quaint, isn’t it?
The Marxists like sanders and that bar tender are the real problems. They fill young people’s heads with the “promise” of communism.
Those guys may be A problem. But neither of their problematicness comes even close to rising above the noise floor.
Debasement; The Fed; is the problem which matters. They are what enables both trillion dollar deficits, and the massive wealth transfers which have left America no better a country to be born in than Argentina. The rest is just nonsense which the gullible, captive indoctrinati is being told to be all up in arms about; in order to distract the dupes from the only real story: Debasement theft.
In our system it takes two institutions to commit the crime. The government spending beyond “its” means, and the Central bank (The Fed) that prints money, buy government bonds and monetizes that spending. … which causes inflation.
It doesn’t take much to exceed the economy’s ability to withstand such abuse, followed by impoverishment of the population.
As long as they can inflate faster than the debt grows they’re happy.
The Fed can stop spending any time it stops purchasing worthless US Treasury bonds. Dead Stop.
Why are US Treasury bonds worthless?
20 % inflation compensated with a meager 4% yield maybe ? …
Politicians don’t even pretend to be fiscally responsible anymore. Why did the Fed bother to raise rates at all? That’s the question.
Why isn’t anyone mentioning the contribution of the ever growing defense budget, now approaching $1 TRILLION EVERY YEAR?
The elephant in the room. Should be renamed “offense” budget. The first item that should be cut IMO. But not even Trump would be willing to make much of a dent in that.
Putin ‘s gonna attack the whole world and its mother , didn t you know ?!
Come on now, those $13 billion aircraft carriers and those $8 billion attack submarines aren’t going to pay for themselves!
The numbers don’t work anymore in America which is why we’re getting multi-trillion dollar deficits in the future. Last year wasn’t great either. Debt matters and countries do go bust. America’s national debt is one of the worst on the planet. We’ve been living on borrowed time and borrowed money. We have a stock bubble, a house bubble and a debt bubble. Bubbles always burst. The entitlement problem can be solved with higher taxes on working people. The shortfall is not that big yet, but it will get bigger. Our democracy is now failing and it’s being papered over with more and more debt. When that debt bubble bursts, we’ll be looking at a period like the 1930s. The dollar is losing buying power which is why housing costs so much. The debt bubble has been increasing for 45 years, but it’s not accelerating. And it’s not just federal debt. Total debt as a % of GDP is at an all-time high. The debt bubble burst around 1929 and resulted in the Great Depression which was largely a debt liquidation through bankruptcies, failed banks and failed businesses. We’re coming close to a similar bust.
Bad Mish! The latter sentence was uncalled for. It’s equivalent to what Hur did.
Biden says he’s recently been consulting with Helmut Kohl and Francois Mitterrand, dead for 7 and 28 years respectively. That’s the “thinking” Biden is capable of.
He should pull up a chair –
link to m.youtube.com
Trump is on tape that he can’t remember he has a memory.
The truth hurts.
Should you add a /Sarc to your posts, just so we don’t think that you are a Cretan?
She is some kind of shill for the MIC or CIA. Completely delusional if not.
Good point! It’s indeed a stupid observation.
The US has been cruising for a fiscal bruising since Trump took office. Now, because the country is completely polarized between electing one of two geezers, no rational debate about fiscal adjustment is possible. As Rudi Dornbusch liked to say, a fiscal crisis takes longer to happen than you think it will, and then the crisis happens much faster than you thought it could.
Well maybe they can go back and force seniors to take the covid vaccine. Problem solved medicare and ss will see a sharp drop in enrollement. Or perhaps another man made virus that will selectively infect seniors. All sounds a bit conspiracy theory paranoia? I would put nothing past those useless maleovent bastards.
I’m done with this clown town national debt. Keep spending. It’s not like I have a choice with elections that have never been fully audited and can’t be fully audited. Cheat, print and bomb away.
It might work out for a couple more decades. All I really need to be honest and I’m outta here so keep doing whatever. I would prefer to plan long term but those days are long long gone. Politicians see no further than two feet in front of their face. It’s going to be a musical chairs situation in 20 years or less. Somebody is going to be left holding the bag that’s for damn sure.
How can social security and medicare contribute to future deficits when by law if revenue doesn’t match “promised payments” then the promised payments will be reduced? These projections should be made based on current law, not some illegal idea that we would borrow to pay for social security.
That’s a good point. The CBO does fiscal projections assuming no automatic cuts and automatic cuts. The legal details about how those cuts would happen are pretty murky (SS recipients would remain legally entitled to full benefits). But in any case, only a suicidal politician would let automatic cuts happen.
As Karl Denninger keeps saying (and no one listens) it’s health care.
VA and other federal health care is another $70 billion or so.
link to cms.gov.
Social Security is 3/4 solvent and the shortfall is easy to fix economically if not politically.
You’re right. SS and Medicare can easily be fixed but Congress is now disfunctional. Presidents don’t pass laws. They’re cheerleaders.
If you know how to easily fix Medicare short of euthanizing half of the elderly population, please let us all know.
You don’t have to kill them.
But at the same time you don’t have to approve all the latest / greatest (and thus most expensive) treatments for them either since they are at end of life. In other words generic meds only and we stop replacing hips etc once past a certain age and when you are in final 6 months of life / terminal we don’t attempt to put you in hospital or do expensive treatments to prolong you for another 2 weeks and so on.
Something like 80% of your lifetime health care expenditure is spent in the last 8 months of life. That’s what’s got to change. Note: People can freely spend they own money on whatever care they want, just not public money.
That’s called de facto euthanasia. And you are going to be on the death panel that decides who has only 6 months left to live?
I think you ignored his last sentence.
Are we a nation of scoundrels that lets some version of Josef Mengele decide who is going to live and who is going to die based on their incomes? I still think we are better than that, but my doubts are increasing.
Some heartless faceless government bureaucrat will be on the death panel. That is how it works in all those national “single payer” systems.
The FED is not so concerned that is will keep lending rates high and deposit rates low..
The government is not going to stop borrowing and spending. It does not matter who wins the next election, or the ten elections after that.
Praising and/or voting for Biden or Trump is a fool’s errand and a total waste of time. Thinking that either one of them will make your life any better is a mirage.
The only person who can make your life better is YOU.
Spend more time on improving your life and less on politics.
^^^^^^ THIS is what I believe. Look after yourselves.
Read ‘Candide’ by Voltaire, stop believing Pangloss, and tend to your garden.
So no mention of any any other government program that is contributing to record deficits? It’s only SS and Medicare? I am confused. The current deficit (not the long term one) has almost no relevance to Social Security. The problem with Social Security at the moment is that it produces no surplus. It has a dedicated source of revenue; for many, the benefit is taxed and Medicare costs contribution costs are deducted from SS. So SS has nil impact on the current deficit and while it was a known known that demographics would factor into a 30 year structural SS trending downward, we had several tax cuts. SS is easily fixable if you want it to be net neutral as far as the national debt and deficits are concerned. Increase the contribution, reduce colas, increase full retirement age, make it all taxable etc. Congress has to first decide if it wants SS to be deficit neutral or produce structural surpluses. They have done neither. But really now, do
We really have a problem with popular program that has a dedicated revenue source and is taxable that can’t be fixed? No mention of our defense budget that is out of control, both on budget and off budget. No mention of military pensions. No mention of the VA. It’s only SS and Medicare that is the source of the deficit problem? I don’t think the math backs that up!
You’re right. There are lots of reasons we have $34.17 trillion in federal debt, and that’s going to $50 or $60 trillion in ten years. This country has terrible leadership. The numbers are depressing. The country is hollowed out by record debt. Interest on the federal debt is now over $1 trillion a year and rising fast. It’s more than Medicare and Defense but less than SS, which is mostly paid for with SS taxes.
Congress could stop spending excess SS and put that into a “lock box” for the future. Hmmm. Where have I heard this?
Congress has spent the accumulated SS surpluses. The “lock box” is just a legal federal trust fund accounting construct that says the Treasury borrowed money from SS and needs to pay it back. You often hear this I.O.U. referred to as being backed by “Treasury Bonds.” That of course is a myth too. The bonds issued by treasury are called “special purpose bonds” and they have no value, are not marketable, are not tradable. They are not public debt. They are, however, “intra government” debt which is simply one branch of the federal government owing money to another branch. Interesting too that our neighbors to the north, Canada, has an entity called the Canadian Pension Plan Investment Board that invests SS receipts. They invest in global companies including American companies, infrastructure funds and on it goes. I fail to see why we approach SS in such a limited and irresponsible way. There are numerous approaches and solutions out there!
The US SS plan is better than the Canadian one.
Because those special purpose bonds aren’t traded, they don’t lose value. The Canadian Pension plan looks great when the stock market is going up but if it goes sideways or down then that plan will suddenly look very insolvent.
The other problem is the US is SO big compared to the Canadian one that if they actually had invested that money in the market they’d have ended up owning literally every company which ironically means you would be technically a socialist / communist country.
What you are saying is that everyone that has an IRA, a ROTH etc is a fool because the stock market can go down. Of course it can do down. But over time……? Is it any worse than a SS Trust Fund that has to borrow to pay back borrowed money? I don’t see the Canadian plan telling its participants that in 10 years they face a 20-25% hair cut. It’s also not all or nothing. SS could also hold cash and it could invest in Treasury Bonds. In fact, per the SS website, that is what we actually did. But the Treasury bond program was suspended. A diversified portfolio of investments, even for a big country, is not the road to socialism. That argument would imply that every country with a Sovereign Wealth Fund is socialist/communist. That would be an incorrect assumption.
Let me ask you which you would prefer to have. An IRA/Roth/401K or a guaranteed government pension? The former means you have to actively manage it (you or someone you pay), that the amount of money you have at retirement can vary widely (based on how your investments perform) and you might run out before you die. The latter means you can sleep at night and never worry about what’s going on in the market because your pension is going to pay X amount per month until you die. Most people want the latter which is why those on government pensions (teachers, cops etc) are living the high life.
That’s the difference between Canada and the US. Canada has the equivalent of the 401K and the US has the equivalent of the guaranteed pension even if that pension means you aren’t living as well as someone who did very well on their 401K but you are living better than those who didn’t. Also, Canada can’t tell anyone they are getting a haircut in 20-25 years because they don’t know until they get there because no one knows what the market will be between now and then so it’s possible they may in fact take that haircut.
As for buying up everything, look at Calpers. They are just the largest pension fund in the world and yet they’d be dwarfed by social security. Calpers already moves the market up/down if they heavily invest in a company. Imagine what would happen when social security bought half of Apple or Microsoft. Would you want them deciding who the board members are or how to invest in future tech etc? Essentially they’d be SO big they’d dominate the investment of every company. It’s not pure socialism but it’s essentially government owned businesses or at worst a 50/50 partner.
You raise good points and clearly a defined benefit is almost always preferable to a defined contribution. I am not saying that SS should be converted to a defined contribution system. I am saying that SS could be deficit neutral long term doing any number of things including increasing the contribution, lowering colas, increasing over time the FRA. I am also saying that if SS were structured so that it continued to produce structural surpluses, those surpluses could be invested similar to the Canadian system. I am not suggesting that the entire revenue stream be converted
Into an investment pool. I like the defined benefit component. But frankly speaking, my own experiences with defined contribution programs has been quite positive. I just
annuitized one bucket of defined contribution proceeds. It’s a reminder too that defined benefit programs have a cost. I think we can and should fix the structural gap while we still have time. It’s doable and there are many ways to do it.
wrote “An IRA/Roth/401K or a guaranteed government pension?”
All else being equal, everyone would choose a “guaranteed government pension”. And that is what government unionized employees choose, because they have the political clout to make the rest of us pay their pensions.
As for the rest of us, a government pension has two problems. 1 it is usually underfunded and can’t pay the promised benefits. This causes sleepless nights for the benefits managers. 2. For the same reason government pensions pay less than a well invested 401k. Because the manager is a poor in-the-mean-time investor compared to a typical manager at Vanguard, much less a John Bogle or Peter Lynch.
Yes, its all smoke and mirrors. There is no trust fund, ss taxes are just another tax and surplus/defict etc are accounting gimmicks. In short, the programs are Ponzi schemes with an expiration date-soon. Making good on ss and health commitments means crowding out other programs, like government wars. It will be interesting but in the near future the can will be kicked.
It’s not a Ponzi scheme largely because ponzi
schemes are illegal. SS as we know it today is legal as is the federal trust fund accounting methodology. But you are correct in that SS has ponzi like attributes. The house of cards, so to speak, rears its head when the program no longer produces annual structural surpluses. But it’s so fixable and easily fixable. But you are right, Congress will kick the can.
Because mandatory spending (SSI and medicare/medicaid) are the elephants in the room. You could eliminate all discretionary spending and still not balance the budget. That’s how bad the situation is. Eliminate SSI and Medicare/Medicaid and there’s more than enough coming into the coffers of the Treasury to fund the govenrment and pay down the debt. You can’t fix the debt problem without address the elephants in the room.
Defense Spending, Military Pensions and Veteran Affairs need to be added to the elephants in the room issue. It may not be in the discretionary category but it keeps increasing every year anyway. Also note, Military Pensions and the VA are not part of the Dept of Defense line item budget. They are separate line items. Together with Dept of Defense budget, you are over 1 trillion a year in expense. I think this qualifies for elephant in the room status!
Dept. of Defense spending is discretionary spending. It can be cut. It can be cut all the way to zero. This would have effects on our foreign relations, some good, many bad.
Is this an excuse to cut rates?
Of course! Lower interest payments for an overspending government has to be at the top of the list of reasons, no?
The chart that matters for US fiscal sustainability is interest payments / tax revenues. FRED data says the situation is far worse than post-WW2.
The trend is unsustainable without serious policy changes.
link to fred.stlouisfed.org
The interest/revenue problem is as bad already as 1982 (that is, AFTER the 1970s), except today we lack any headroom on debt/GDP.
Back in 1982 the fiscal conservatives called out profligates as “tax-and-spend”. There was enough public shaming that deficit spending was held in check. But in the 2000s the meme morphed to “borrow-and-spend”. Nowadays they just “print-and-spend”.
But debt/GDP says there’s no more ability to borrow our way out of this. Like Wile E. Coyote, we’re already off the edge of the cliff, facing a sudden plunge.
Exactly, at some point no one will lend the US money. I’m shocked that the 10-year bond is only paying 4%. That’s not much considering the debt load and risk.
What’s the alternative?
Put it under the mattress and lose 5+ percent a year to inflation
Put it in the stock market and risk a downturn
People nearing or at retirement age can’t take big risks and so are happy to get 4%.
Note: Before someone says ‘gold/silver’, just remember there isn’t enough gold/silver to go around for everyone to do that and it’s not practical to have a bunch of gold and silver coins under your mattress.
There are many alternatives to owning US Federal debt, besides “mattress cash” and “risky stocks”. Even beyond “gold/silver” and “bit****”. One can start by lending to banks or others outside the government sector. One can buy productive real estate. One might use savings to create or buy a business – not all are vulnerable to market crashes. More traditionally, one might invest in children or grandchildren (e,g. paying for education), with the understanding that they will help support their elders later on. If one is willing to make the effort, there are plenty of ways to create and store value without “enabling” wasteful government spending by buying the debt.
Things haven’t gotten to the it’s-really-bad stage yet. But all those rich buying housing in Vancouver, Canada, and farmland, etc. is intended as an inflation hedge, not as an investment that benefits all of us.
You also had massive annual SS surpluses in the 1980’s that flowed to the Treasury. This “free money” reduced the amount of public debt (bonds) that Treasury had to issue. During the Clinton years you had several years where the budget was said to be balanced. This is a myth. You still had structural “on budget” deficits but Treasury did not have to issue public debt. Why? Because they had hundreds of billions in SS surpluses.
“Artificial Intelligence (AI) will undoubtedly increase productivity.”
We don’t need no freakin’ AI, we got illegals! They’ll boost the economy. I’m sure of it…
AI is going to replace jobs on a scale that’s virtually unimaginable. I have mentioned before that I do some freelance writing as an enjoyable side-hustle… Well, some of my out-of-work counterparts are now thrilled to be teaching/training AI for $20/hour.
Like it or not, there’s soon going to be some sort of basic income scheme in the U.S. for all of the jobs that AI replaced. Either that or we’ll just continue to get rich selling stonks and real estate to each other. Govt spending isn’t going down anytime soon.
Very much agree. And once you are on UBI you’ll be trapped there. Not making enough money to pay for training to get a decent job, and few jobs to go around. I hear alot of people say they will just go into the trades. What’s that going to do tradesmen’s wages when tons of people flood into the trades?
We heard the silly nonsense from silcon valley and politicians that out of work blue collar people can just be retrained. “Learn to code” is what we heard. I’m not aware of any significant retraining efforts. Now alot of those IT people are headed for unemployment. What will they do?
I’m not proposing the governemnt step in, but one has to acknowledge the disruptive nature of AI.
I saw an article that a Waymo self driving car was vandalized and set ablaze in San Francisco the other day. I suspect we will see more of this sort of thing as AI elimates more jobs.
It’s gonna get bumpy.
Saturday Morning Breakfast Cereal – Bot (smbc-comics.com)
FEMA is still rolling out the covid cash. Just make sure to get covid on a loved one’s death certificate as a contributing factor and you can get up to $9000 cash. Program runs thru Sept 30, 2025.
link to fema.gov
But if you survived covid (and the “vaccine”) you continue to pay taxes.
Other than Fed, who is going to fund that large deficit, where money will come from? Foreign ownership of the debt has been declining, right?
Anyone who promises to address any of this is unelectable. This scares me greatly. I have seen in microcosms … how most folks no longer possess reasoning skills and far prefer to scream, call names, and threaten. I wish I saw a way to start addressing this … but talk of tax increases or spending cuts makes one unelectable … not pretty.
The movie Idiocracy wasn’t a hyperbole, it was a guide.
Brawndo’s got what plants crave…..
It’s pretty scary. We have dysfunctional government. We’ve got 80 million people who are retired and or disabled. No one is going to hire them. We’re getting a huge inflation tax. Salaries in grocery stores are going up and that’s reflected in prices. Buying a house is unaffordable now for 75% of the population. The national debt is going to $50-$60 trillion in 10 years and Interest on federal debt is over $1 trillion. It’s the 2nd biggest item in the federal budget. More than defense or Medicare.
Don’t worry, Trump will fix this. He is an expert in going bankrupt (done it six times). It will be HUGE.
Democracy sows the seeds of its own demise; it’s now going full bore. An alternative anyone?
Authoritarian regimes are much worse (fiscally). They are bankrupt by definition.
Didn’t the FED create counterfeit money that just flows from the printing presses? No wonder even lesser creates that require no job qualifications, treat it as monopoly.
Did you honestly expect some other outcome? People want what they want. Especially boomers. They’ll bankrupt their own children, then blame them for the national bankruptcy.
People want the benefits they PAID INTO and were PROMISED. I’m going to start collecting when I turn 62 this year.
I am so glad that I receive SS. I feel badly for my children, who won’t — although they pay into it and are also “promised.” But then, I don’t know what country they’ll be living in by then since the US will have broken up. Maybe the Republic of the Rocky Mountains, or some such legacy state of the former US of A.
What you PAID INTO is nothing compared to the benefits you are going to get and that’s the problem. You don’t need to believe me, just review the history of medicare.
link to medicareresources.org
Over the years, more and more “benefits” are being dole out and it’s mathematically impossible for you to have paid into all these benefits if they didn’t exist when you paid for them.
It’s like you paid for a Ford Pinto but are ending up with a Cadillac.
There’s a saying if it’s too good to be true, it’s probably a scam.
The same goes for social security, you paid peanuts and are expecting a full buffet.
When I paid into social security I was told what I would receive from social security. That is what I EXPECT to get.
You’ll not get what you expect, you’ll get what you’ve got coming. Sit and whine or get off your sorry ass.
I’ve been retired for over 12 years now.
A $1 paid in 1976 would be worth what @ 3% annual interest rate today?
1.03^48 = 4.13
$4.13
But interest rates were not 3% for the last 48 years.
The private sector must fully fund their pension benefits, otherwise the auditors will downgrade their opinion.
I read, since 1991, of pensioners in Russia who receive Soviet Social Security checks. Paid for by Russia, of course. The typical check was about $30/month.
I heard, c.1980, that Soviet pensioners don’t get Soviet SS checks unless they are in the USSR. The person telling me this was dumbfounded that American retirees received SS checks even though they lived in Poland.
You know that there is a difference between PROMISED and actually receive, right? That does happen, particularly in the private sector. The federal PBGC takes over bankrupt private pension funds, and the pension check is typically reduced. In concept Social Security is headed the same direction, and SS checks would deserve to get reduced, too.
People have written that when SS was first implemented, the average person would only collect for 2-5 years before they died. The current life expectancy age in the USA is around 78 years.
Therefore, as someone collecting SS, I am happy to support increasing the SS retirement age to say 72-74 and disabling early collection.
72 is probably too high as most people age 70ish would not be able to do any actual jobs (won’t be hired and even if they were, likely could not physically perform minus a few desk jobs).
Age 62 is WAY too low. 68 should be the minimum age to collect and the age at which you get minimum benefits (the equivalent of collecting at age 62 now). That would rise if you waited to collect until age 70+.
Bismark picked 65 as the pension age as 90 percent of all Germans were dead at 65. If 90 percent of Americans were dead at retirement age, Social Security would be fine.
I spoke recently with a Wal-Mart greeter. He is 70 years old.
The Japanese are on top of this more than we are, and are making changes to the work-place so that older people can continue working.
America is a debt Ponzi, all Ponzis collapse. Congress and Presidents can’t be trusted and we have members of the Supreme Court who are being bribed, or receiving money laundered through salaries of their wives. When bankers from J.P. Morgan and Bank America are complaining about debt, you know something’s seriously screwed up. We had a Great Depression which was basically a liquidation of too much debt. It can happen again.
Hi Mish,
I’m wondering what would happen if a US president ditched NATO and left them to the Russian’s. Then Europe in retaliation as a whole decided to stop trading in the USD. The BRICS alliance have already done this. Would it tank the US economy by sending the value of the US$ through the floor?
Good question, and maybe they should. NATO is a costly anachronism. Like Kunstler says, “Russia, Russia, Russia.”
Should have allowed the Europeans to slaughter themselves in 1917, except the big U.S. banks were already sponsoring it prior to July 1914. Behind any dust-up anywhere in the world there’s a good probability of a Brit hiding behind a bush. BoJo The Clown is only the most recent sociopath.
“it is done.” – Liz Truss text to Blinkin minutes after Nordstream blown up. Putin was too polite to mention that directly to Tucker, but only “surely it was you” part.
Why on Earth would Russia want any part of Europe? NATO exists only as cover for America to boss around its vassals and stir up trouble around the world.
“The U.S. federal debt is now roughly as large as the country’s annual GDP.”
…..from the SF FED report
Yea their math SUCKS there too. $27T is NOT roughly $34T. In fact the debt is 21% higher than the annual GDP in 2023. I don’t consider 21% “roughly”
The FED hates you/me and they can kiss my ass
Here is a really big issue for the banking industry.
link to thedailydoom.com?
Thank a teacher (Union). They were the first to pull the lockdown fire alarm. “If only one life is saved, it is worth it. After all, we are all in this together.”
It’s not just the commercial banking industry. The economies of whole cities and towns are dependent on tax revenues from commercial real estate and almost all local businesses are dependent on the foot traffic that results from commercial buildings being almost fully occupied.
All of this was precipitated by politicians and health officials submitting to raw fear of Covid and ordering the emergency closing of most businesses and people to stay home (“shelter in place”).This resulted in many companies implementing WFH (Work From Home) plans that emptied many commercial buildings.
Once companies recognized that they could successfully run their businesses without having their employees in the same geographic location and employees saw the extra time they gained in their day and their corresponding increase in productivity once commuting was removed from their day, there was no going back.
Politicians are begging companies to return their workers to centralized locations. Their is strong tug of war between politicians, employees and employers over how work is conducted.
Pandora’s box has been opened. It can’t be closed.
One can only hope that’s true