HOW BIG IS THE GOVERNMENT'S DEBT?

NATIONAL CENTER FOR POLICY ANALYSIS
By Andrew J. Rettenmaier
Brief Analysis - No. 402
Friday, June 21, 2002
Source

Reports about the enormous federal debt abound, as do dire predictions about the impact of that debt on future generations. But just how big is the debt?

If we use the most common definition -- the sum total of all outstanding bonds held by the public -- the federal government debt stood at $3.3 trillion at the end of 2001. That amounts to $11,657 for each American. However, this explicit debt measure does not reflect the full magnitude of what the government owes. Looming just over the horizon -- and wholly ignored by current measures -- are the accumulated obligations to pay Medicare and Social Security benefits to the baby boom generation and other current program participants. Although not officially reported as debts, these implicit commitments dwarf the debt held by the public.

The entitlement (or implicit) debt considered in this analysis includes only Social Security and Medicare. It indicates the total value of all the benefits earned up to the present day by each person who has earned benefits from both programs by working in the labor market and paying payroll taxes.

Note that Medicare's accumulated obligations are larger than Social Security's. This might seem unusual to the casual observer, since Social Security annual expenditures for the foreseeable future are larger than the annual expenditures for Medicare. The reason why Medicare obligations exceed Social Security obligations is that it is easier to qualify for Medicare. To qualify for full Medicare benefits, individuals need only contribute for 10 years. By contrast, individuals who contribute to Social Security for 10 years qualify for only minimum Social Security benefits. As individuals work more years - and contribute more taxes - their Social Security benefits increase. The total debt calculation does not anticipate what additional taxes will be paid or benefits earned in the future. Instead, it looks at past earnings and program participation to determine what benefits have been earned up to the present day.

Note also that the liabilities depicted in Figure I are "unfunded" liabilities, in the sense that no funds have been put aside to pay for them. Currently, revenues from the (FICA) payroll tax are used to pay all the expenses of Social Security and some of the expenses of Medicare. When payroll tax revenues have exceeded benefit payments, the surplus has been used to fund other government programs, and more recently to pay down the government's explicit debt. No funds have been put aside to pay for future benefits. Nothing has been invested and nothing has been saved that is dedicated to Social Security and Medicare.

The accrued obligations of both Social Security and Medicare are significant. How will these debts be paid? By 2017, payroll tax revenues collected from workers will not be enough to pay full benefits. Thus, the tax rate needed to support Social Security and Medicare will necessarily grow continuously into the future. Today the payroll tax rate for Social Security retirement and disability insurance is 12.4 percent.

Will future taxpayers, many of whom are not yet born, be willing to pay these high tax rates with no assurance that their own benefits will be paid when they retire?

Another way to think about the debt is shown in [Figure II below], which demonstrates how the debt changes over time. This alternative measure nets out future tax payments from anticipated benefits for all program participants in a given year.

It is often noted that the government debt grew substantially during the presidency of Ronald Reagan. This statement is misleading. The explicit public debt did increase between 1980 and 1988 - from 26.1 percent of Gross Domestic Product (GDP) to 40.9 percent. However, based on the alternative measure of Social Security's unfunded obligations, over the same period implicit Social Security debt actually fell - because of the reforms adopted in 1983. As a result, the combined Social Security and explicit government debt fell from 232 percent of GDP in 1980 to 157.5 percent of GDP in 1988. Thus the combined government debt was reduced by 32 percent - almost one-third - during Ronald Reagan's term in office.

During the presidency of George H.W. Bush, the combined debt rose from 156.3 percent to 172.08 percent of GDP. By the end of the Clinton presidency, in 2000, the combined debt had fallen to 135.52 percent of GDP.

As history shows, promises to fund entitlement benefits are subject to the will of Congress. Yet it is important to keep track of those promises. Measuring implicit entitlement debt serves two important purposes. First, it more accurately shows what promises the federal government has made to current workers and retirees and assigns a cost to the commitments. Second, it clearly demonstrates to policy makers how decisions to increase or decrease entitlement benefits will impact current and future generations.

Andrew J. Rettenmaier is an NCPA senior fellow and the executive associate director of the Private Enterprise Research Center at Texas A&M University. The analysis is based on "Meaningful Measures of Fiscal Deficit and Debt" coauthored with Liqun Liu and Thomas R. Saving.

How Big Is the Government's Debt? "When these obligations are combined with the debt held by the public, the total burden equals $33.1 trillion, or 10 times the official debt measure. This "total debt" is more than three times the size of the nation's total output in 2001, and amounts to $116,381 for every man, woman and child in America."

"If the American People ever allow the banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property, until their children will wake up homeless on the continent their fathers occupied. The issuing of money should be taken from the banks and restored to Congress and the people to whom it belongs."
Thomas Jefferson

"The burden of debt is as destructive to freedom as subjugation by conquest."
Benjamin Franklin

SECRETS OF THE FEDERAL RESERVE
On September 30, 1941, before the same Committee, Governor Eccles was asked by Representative Patman:

"How did you get the money to buy those two billion dollars worth of Government securities in 1933?

MR. PATMAN: And there is nothing behind it, is there, except our Government’s credit?

ECCLES: That is what our money system is. If there were no debts in our money system, there wouldn’t be any money."

ECCLES: "I mean the Federal Reserve, when it carries out an open market operation, that is, if it purchases Government securities in the 167 open market, it puts new money into the hands of the banks which creates idle deposits.

ECCLES: Whenever the Federal Reserve System buys Government securities in the open market, or buys them direct from the Treasury, either one, that is what it does.

DEWEY: What are you going to use to buy them with? You are going to create credit?

ECCLES: That is all we have ever done. That is the way the Federal Reserve System operates.

ECCLES: I mean the bank creating money by the purchase of Government securities. All is created by debt--either private or public debt.

FLETCHER: Chairman Eccles, when do you think there is a possibility of returning to a free and open market, instead of this pegged and artificially controlled financial market we now have?

How Big Is the Government's Debt?
"When these obligations are combined with the debt held by the public, the total burden equals $33.1 trillion, or 10 times the official debt measure. This "total debt" is more than three times the size of the nation's total output in 2001, and amounts to $116,381 for every man, woman and child in America."

"With the decline of society begins, indeed, the bellum omnium in omnia war of all against all, which some philosophers observing to be so general in this world, have mistaken it for the natural, instead of the abusive state of man. And the fore horse of this frightful team is public debt. Taxation follows that, and in its train wretchedness and oppression."
Thomas Jefferson to Samuel Kercheval, 1816. ME 15:40

We have photographic evidence that there is a Social Security Trust Fund. However, in realistic terms, we have no Social Security Trust Fund.

Social Security Trust Fund Threatened - Forbes.com
"The Social Security Trust Fund is a mythical beast, but a vitally important one--so important that politicians of all stripes have agreed to protect as if it were the last bald eagle.

..In fact, there is no Social Security Trust Fund. The government collects FICA taxes as it does other taxes. These taxes are then "dedicated" to pay Social Security benefits, but they are at the same time used to pay general revenues. Benefits paid this year come from taxes collected this year."

A Second Look at Social Security's "Trust Fund" - The Heritage Foundation
"Congress could go out tomorrow and spend every dime of the Social Security surplus, and it wouldn't affect the program's future security one bit. Or they could wall it off -- put every penny in the proverbial "lockbox," for that matter --and the program's future would still be about as financially sound as an Enron profit report.

The reason is as simple as it is startling: There is no Social Security "trust fund" -- at least, not in any conventional sense of the phrase. The taxes that come out of your paycheck on a regular basis aren't deposited into an account with your name on it, as many people believe. The money is immediately paid out as benefits to current retirees, and whatever is left over is mixed together with other tax funds and used to finance other government programs.

The same thing will happen when you retire: People who are working at the time will be paying your Social Security benefits."

Social Security: The Clock is Ticking The Washington Post
"Often ignored in the debate is the inevitable effect that the huge increase in payouts to retiring Boomers will have on the federal budget.

That's because, in some ways, the Social Security Trust Fund is a fiction. It technically holds government bonds, but – as a way of disguising the size of the federal deficit – the government doesn't count those bonds as debt.

So in about 15 years, when the trust fund starts turning in its bonds for cash to pay benefits, the government will have to raise that cash. It can do so in only three ways: by increasing taxes, cutting other spending or running a deficit."

What Trust Fund?

HOOVER INSTITUTION
HOOVER DIGEST
By Thomas Sowell
1999 No. 4
Source

Thomas Sowell exposes the accounting sleight-of-hand known as the Social Security trust fund.

They say a picture is worth a thousand words. But, in this age of spin-masters, a picture can be more deceiving than a thousand words.

In response to those economists, including Senator Phil Gramm, who have been saying that the Social Security “trust fund” is a myth, Kiplinger’s magazine sent a reporter down to Parkersburg, West Virginia, to photograph the trust fund. He came back with a picture of the securities in that trust fund, as well as a diagram of the safe in which these securities are kept and a picture of the computer that keeps track of the Social Security trust fund.

The March issue of Kiplinger’s even gave us the latitude and longitude of Parkersburg, in case we want to go there and check it out. Yes, Virginia, there is a trust fund—or is there?

Let us think the unthinkable, that there is no Social Security trust fund. Where would the baby boomers’ pensions come from? From money that will arrive in Washington after they retire.

However, since we have photographic proof that there is so a trust fund, where will the baby boomers’ pensions come from? From money that will arrive in Washington after they retire. It seems that the distinction between a trust fund and no trust fund is one of those “distinctions without a difference” that lawyers talk about.

As a purely formal paper transaction there is a trust fund. Money comes in from the millions of paychecks from which there has been withholding under the Federal Insurance Contributions Act—the FICA listed on paycheck stubs. The Social Security system then uses this money to buy interest-bearing securities from the Treasury Department. When cash is needed to pay retirees, some of these securities are sold to get the money to pay them their Social Security pensions.

Still looking at form, rather than substance, this system has the further political advantage that the securities held by the Social Security system are not counted as part of the national debt, because it is one government agency owing money to another. What that means is that, when the government spends more money than it receives in taxes— which it is still doing, despite the official budget “surplus”—it spends money from FICA to cover the difference and gives the Social Security trust fund an IOU that does not count as an IOU in figuring the annual deficit or the accumulated national debt.

If only we could all make our debts disappear so conveniently!

Turning from form to substance, what the government is doing is spending the Social Security money for current outlays, not only for pensions to retirees, but also for everything from congressional junkets to nuclear missiles. What is left in the trust fund for future retirees, including the large and much-feared baby boomer generation whose pensions are scheduled to cost trillions in the twenty-first century?

What is left is a promise to pay them. That is precisely what would be left if there were no Social Security trust fund. Treasury securities are nothing more than claims against future revenues from general taxation. Social Security can of course also draw against the continuing inflow of FICA from workers, but everybody knows that this source will be completely inadequate to pay what will be owed to the baby boomers.

The staggering amounts needed to make up the difference—greater than the costs of financing a major war—will have to come from somewhere. Either there will be huge increases in tax rates on those still working or some form of welshing on the promises made to retirees. No doubt there will be creative compromisers who will come up with some judicious blend of higher taxes and partial defaults, whether by inflation to reduce the real value of the pensions, an older retirement age, or higher taxes on Social Security income, in order to take back with one hand part of what was given to retirees with the other.

No matter how it is done, it will always be possible to photograph the checks that Social Security recipients receive, thereby “proving” that there has been no default. The question is how much comfort and reassurance that will be to a generation that knows it has been cheated of what they were promised and paid for, even if they cannot follow the accounting sleight-of-hand by which it was done.

No, Virginia, there really is no Social Security trust fund. Politicians have already spent it, behind their smoke and mirrors.

The Truth is Out There

March, 1999

We went in search of the social security trust fund and found it in a small town in West Virginia. Trust us.

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PART 4

Partial Excerpt:

"That's the real reason for our pilgrimage to Parkersburg: to see, to touch, to photograph this tangible proof that the trust fund exists.

It's kept in a modern glass-and-steel building that seems somewhat out of place next door to the stately, stone Wood County Courthouse, built in 1899. Security is tight. Employees and visitors must pass through metal detectors, and briefcases and packages must be x-rayed. Then there's the armed guard.

On the third floor, a combination lock protects the door to a large room cut into Dilbert-like cubicles. Hard up against a workstation where an accountant is toiling sits a cream-colored, five-drawer file cabinet with a serious-looking Sargent & Greenleaf spin-combination lock.

This is the "vault" that holds the "certificates of indebtedness" that make up the trust fund.

An employee pulls out a stack of accordion files about 18 inches high. The 8 1/2-by-11-inch certificates piled inside are simple, not nearly as elaborate as awards handed out for perfect attendance in third grade. There's no fancy calligraphy, no gold seals. When a new certificate is needed, an accountant calls up a template in WordPerfect, types in the dollar amount and interest rate, and prints it out on a nearby Hewlett-Packard printer.

The entire trust fund is carefully posed for a photo in the office of Howard Stevens, the director of the division of special investments, who signs each new certificate as the agent for the secretary of the Treasury. The computer that creates the certificates poses, too, as does the printer that spews them out. But congeniality evaporates abruptly when the camera turns toward the file cabinet.

"You can't take a picture of the file cabinet," warns one employee, who reacts skeptically when told that permission was granted by officials in Washington. "But no one has ever taken a picture of the file cabinet," he says. "Never." Phone calls to Washington result in the ultimate verdict: There will be no photo of the trust fund's file cabinet. After all, the bad guys could see it and figure out how to break in.

All the concern about protecting these nonnegotiable certificates is somewhat disconcerting. Maybe the conspiracy theorists are on to something. Maybe, as Hamlet's mom says, government officials doth protest too much about the need to protect pieces of paper that have absolutely no value to anyone but the Social Security Administration.

Do they really need a 25-foot-high concrete flood wall just beyond the parking lot to protect this building--and the rest of Parkersburg--from the Little Kanawha? Is there some sort of subliminal message in the fading, painted advertisement for Pan Handle Coffee on the brick building catty-corner from the trust fund's home? Is it significant that the man who signs the certificates, a 26-year federal employee, never expects to collect a dime from social security? (He's covered by the civil service retirement plan.)

But let's not be paranoid. The trust fund does exist. We've seen it."

Dear Americans: You have a piece of paper. It's worthless. You have a social security trust fund. Hallelujah! Dear Americans: There is no social security trust fund in reality.

WHAT SOCIAL SECURITY TRUST FUND? - Quotes

Property Rights:The Hidden Issue of Social Security Reform - You Don't Have A Right To Benefits! - The Cato Institute - Professor Charles E. Rounds Jr.

Social Security lies - Walter Williams
"Here's what the 1936 government pamphlet on Social Security said: "After the first 3 years -- that is to say, beginning in 1940 -- you will pay, and your employer will pay, 1.5 cents for each dollar you earn, up to $3,000 a year. ... Beginning in 1943, you will pay 2 cents, and so will your employer, for every dollar you earn for the next 3 years. ... And finally, beginning in 1949, 12 years from now, you and your employer will each pay 3 cents on each dollar you earn, up to $3,000 a year."

Here's Congress' lying promise: "That is the most you will ever pay."

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