“The government is on an unsustainable fiscal path.”
Where We Are Headed
As baby boomers retire and health care costs continue to rapidly rise, the cost of the Social Security, Medicare, and Medicaid programs will account for a growing portion of government cost.
Absent reforms, the Social Security Trust Funds will be exhausted in 2041 and the Medicare Part A Trust Fund will be exhausted in 2019. Revenue dedicated to these entitlement programs under current law will not be enough to pay for scheduled Social Security and Medicare Part A benefits.
The projected cost of all federal programs will exceed available resources. Unless the government brings program cost in line with available resources, resulting budget deficits will be so large that the government will not be able to borrow enough to fund them.
Our children and grandchildren will bear a greater burden of the cost if we delay in implementing fundamental reforms.
What Came In and What Went Out
What came in? In 2007, government revenue totaled $2.6 trillion. What went out? The government’s operating cost totaled $2.9 trillion. The “bottom line” net operating cost-the difference between revenue and cost-was $276 billion-a $174 billion decrease from 2006. It is also more than $100 billion greater than the unified budget deficit, as it includes approximately $90 billion in accrued, but as of yet unpaid, post-employment benefits to the millions of people who are part of the government’s current and retired civilian and military workforce. The budget deficit is the amount by which the government’s spending exceeds its revenue, and thus, is a measure of how much the government has to borrow from the public. The budget deficit decreased $85 billion to $163 billion in 2007.
In 2007, a growing U.S. economy led to record revenue of $2.6 trillion. Chart 2 shows that government revenue increased steadily from 2003 through 2007, largely because of taxes on increasing individual incomes and corporate profits. Social Security tax revenue of $648 billion and Medicare tax revenue of $200 billion accounted for almost a third of total revenue. The recent slowing of U.S. economic growth will have an effect on 2008 revenue.
The government’s net cost in 2007 was relatively constant compared to 2006. Chart 3 shows that in 2007, the Department of Health and Human Services (HHS), Department of Defense, and Social Security Administration, plus interest on debt held by the public, accounted for approximately three-fourths of the government’s total net cost. Medicare cost of $368 billion and Medicaid cost of $188 billion accounted for more than 80 percent of HHS’ total net cost in 2007.
The government incurs debt when it borrows from the public to fund its budget deficits.
The government also incurs debt when government funds invest their excess receipts in government securities. Of the government’s total debt of about $9 trillion at the end of 2007, approximately $5 trillion was debt held by the public in the form of Treasury securities, such as bills, notes, and bonds. The public includes individuals, corporations, state and local governments, Federal Reserve Banks, and foreign governments.
The balance of the debt-nearly $4 trillion-was intragovernmental debt. This represents debt held by government funds, including the Social Security ($2.2 trillion) and Medicare ($359 billion) Trust Funds. These government funds are typically required to invest any excess annual receipts in federal securities. When the government borrows these excess receipts, it still has an obligation to repay them to the government funds with interest. If expected budget deficits continue, as the government funds redeem the federal securities to pay for benefits or other program cost, then additional borrowing from the public will likely be required.
An Unsustainable Fiscal Path
The projected growth in spending for Social Security and Medicare benefits affects every citizen in the nation. Scheduled benefits under these programs are expected to exceed dedicated revenue (e.g., payroll taxes and premiums) by more than $40 trillion (present value) over the next 75 years, under current laws and policy. The fiscal imbalance is even larger looking beyond 75 years. Moreover, without reform:
- In 2007, Medicare Part A benefit payments began to exceed the program’s tax revenue.
- In 2011, the Medicare Part A Trust Fund begins to decline as benefits exceed payroll taxes and trust fund interest.
- In 2017, Social Security benefit payments will begin to exceed the program’s tax revenue.
- In 2019, Medicare Part A Trust Fund assets will not be enough to pay full benefits. Under current law, benefits would be reduced to 79 percent of scheduled benefits in 2019, declining to 29 percent by 2081.
- In 2027, Social Security Trust Funds begin to decline as benefits exceed tax revenue and trust fund interest.
- In 2040, federal debt held by the public will exceed the historical high of 109 percent of GDP.
- In 2041, Social Security Trust Funds’ assets will not be enough to pay full benefits. Under current law, benefits for all retirees would be reduced to 75 percent of scheduled benefits in 2041, declining to 70 percent by 2081.
- In 2080, total government cost will be more than three times revenue.
Alan Greenspan says financial crisis is ‘like a tsunami’
Former Federal Reserve chairman Alan Greenspan has called the recent turmoil in the global financial markets a “once in a century credit tsunami”. Speaking before Congress, Mr. Greenspan, who stood down as Fed chairman in 2006, said the crisis had left him “in a state of shocked disbelief”. He added that recovery in the US housing market was “many months” away. However critics said Mr. Greenspan could have boosted regulation of the markets to help prevent the crisis.
Mr. Greenspan made the comments to the House of Representatives Committee on Oversight and Government Reform. Committee chairman Henry Waxman, a Democrat, suggested that Mr. Greenspan had added to the problem by rejecting calls for the Fed to regulate the sub-prime sector and some complex, risky financial products.
“The list of regulatory mistakes and misjudgments is long,” Mr. Waxman said.
“Our regulators became enablers rather than enforcers. Their trust in the wisdom of the markets was infinite,” he added, saying that the mantra became “government regulation is wrong”. One of the main criticisms against Mr. Greenspan was that he left interest rates too low for too long, thereby fuelling the housing boom – which later turned out to be unsustainable.
However the former bank boss said he had made a “partially” wrong decision in thinking that relying on banks to use their self-interest would be enough to protect shareholders and their equity. He acknowledged that his approach had had a “flaw” that had been shocking “because I’d been going for 40 years or more with very considerable evidence that it was working exceptionally well.”
Mr. Greenspan’s comments come as significant uncertainty remains in global markets, amid fears that key economies have already entered a recession. Some share markets and currencies have been especially volatile, prompting intervention by governments to prop up banks and boost the financial sector.
Recent developments include:
- Russia has moved to boost its currency in the wake of a sharp slide in oil prices and declines in foreign investments. In the past week gold and foreign reserves are down $15bn (£9.3bn)
- French President Nicolas Sarkozy on Thursday mooted setting up a state-run investment fund to help protect national firms and aid small firms in difficulty
- Sweden’s central bank tried to boost its economy by cutting interest rates by half a percentage point to 3.75% and said it planned to make further cuts within six months
- Hungary unexpectedly increased its interest rate by three percentage points to 11.5% on Wednesday in a bid to boost its currency, the forint
- Earlier, some Asian indexes saw sharp falls, as investors worried about the prospect of a global recession.
- South Korea’s Kospi index was down 7.4%, its lowest close since July 2005, while Hong Kong’s Hang Seng index was down 4.7%, at its lowest level since April 2005.
However, after a volatile session, the London FTSE 100 index ended up 1.16%, while France’s Cac 40 rose 0.38% and Germany’s Dax fell 1.13%.
South Korea is one of a number of countries that has recently seen a substantial withdrawal of capital as worried investors take their money out. The phenomenon, which is also affecting others nations including Hungary, Iceland and Pakistan, represents a new and worrying phase of the financial crisis. We are seeing a massive flight of capital out of economies perceived to have been living beyond their means – either because they have a substantial reliance on foreign borrowings or because they are net importers of good and services, or both.