from Follow the Money

So does the President think the US is bankrupt right now?

January 12, 2005

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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By the President’s definition, Social Security is bust because it can only pay about 80% of promised benefits with dedicated revenues in 2053, after the trust fund is exhausted in 2052, and only 75% of promised benefits in 2062 (using the CBO forecast).

"If you’re 20 years old, in your mid-20s, and you’re beginning to work, I want you to think about a Social Security system that will be flat bust, bankrupt, unless the United States Congress has got the willingness to act now," Bush said.

Right now, though, the non-Social Security part of the government has dedicated revenues sufficient to cover only about 70% of its expenses. Revenues in 2004 were around 11.3% of GDP, expenditures were about 16.25% of GDP (including interest payments on the Social Security trust fund), for an overall deficit in the non-Social Security part of government of a bit under 5% of GDP. Put differently, non-social security govenment spending exceeded non-social security revenue by over 40%.

(One note: I used the CBO’s data for FY 2004, and the Trustees’ data for calendar year 2004 for Social Security, I could not quickly find the CBO’s forecast for FY 04 Social Security payroll tax revenue. The resulting error is tiny).

On the external side, revenues (exports) only cover 65% of our current spending (imports). By my calculations, based on data through November and conservative estimates for December exports and imports, end 2004 exports will be around 9.75% of GDP, imports around 15.05% of GDP. Our current trade deficit of 5.3% of GDP is equal to 54% of export revenues.

In other words, using the President’s criteria for Social Security, we are already bust.

I know I have my CD player stuck on repeat, but the current cash flow gap of the government, and the large and growing gap between exports and imports and resulting rapid external debt accumulation, are immediate, serious problems -- problems worthy of attention at the highest levels of government.

Instead, we are talking about "reforming" the one part of government that has a cash flow surplus, and the "fix" involves, more or less, getting rid of the cash flow surplus, so the government has to borrow more in the markets. Under the Commission Model 2 reform plan, the Social Security system would need to draw on general revenues in 2006, rather than 2019; the trust fund would run out in 2038 rather than 2052, and benefits would still exceed revenues until 2050 (the plan solves this with "transfers" from general revenues -- not repayment of trust fund bonds, simple transfers). All my numbers come from the CBO. In 2025, the gap between payroll tax revenues and benefits would be 0.64% of GDP if we did nothing, and 1.04% of GDP under the Commission’s plan 2 (to be clear, in both cases, the gap is covered by the trust fund -- i.e. past payroll tax surpluses; only after 2036 does the Commission’s plan 2 rely on simply transfers from general revenues). The cash flow savings (if they ever occur) don’t start in 2050.

Another rant. Talk of the social security’s "3.7 trillion deficit" (over 75 years), or its "$10 trillion deficit" (over a longer period) is beginning to frustrate me for the following reason: present value accounting is a powerful tool, but it does not tell you anything about when the deficits occur in time. The underlying gap between revenues (including revenues from the trust fund) and expenditures that gives rise to these present value deficits does not open up until 2052 (according to the CBO). In 2055 the gap is 1.6% of GDP, in 2075 it is 1.8% and so on.

Don’t get me wrong, I do worry a bit about 2055. But I worry a lot more about how we are going to get from 2005 to 2015. The economic shifts required to bring our trade deficit down to zero -- something that has to happen if we want to avoid an external debt to GDP ratio that would reach something like 85% of GDP in 2015 (85% assumes that the trade deficit stabilizes at around 5% of GDP but the current account rises as a percent of GDP because of rising interest payments) -- are massive, and will occur when the government does not have much fiscal ammunition stored up to cushion the adjustment process.

There are other cash flow gaps out there that if extended off into the infinite future have a much higher present value that the deficit in the Social Security system, and they -- unlike the Social Security system’s NPV deficit -- are likely to cause us trouble in the near future.

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