I have a lot of thoughts rattling around my brain the past few weeks. Normally, I'd like to bounce them off someone to see what others think. However, finding someone who can keep up with my randomness is difficult. Read: impossible. So I shall pour out my thoughts here, and hope that you, dear reader, will have the patience to read on.
Still here?
Ok. Thanks. :)
This morning I've been thinking about the debt in the United States. The current budget in the US is a complex thing, but to (perhaps overly) simplify:
1. Social Security. We pay a lot for Social Security each year - more than we do any other single expenditure. Social security itself is a complex thing. Instituted back in the FDR administration as a way of providing for elderly/retiring folks, as well as for those who are permanently disabled, and for those who are temporarily unemployed. The program is relatively simple to understand - those who are currently working pay into a pool from which the retired, etc. draw. As long as the number of people pouring into the pool is larger than those drawing from it, everything is fine.
Social Security was based on a number of assumptions, though, that have not proven to be true. The biggest impact has to do with the number of children born. It seems perhaps a little strange to consider, but people my age (generation X) are part of a dearth of babies born in the wake of the baby boom. Thus, the ratio of people pouring into the pool to people drawing from the pool is now about 3:1, down from 5:1 in 1960, and headed to an estimated low of around 2:1 in 2030. At that point, the ratio should even out. But the birth rate continues to be low, and it's unclear that the number of employed will ever be like it was when the initial assumptions and targets were made.
Another assumption is an increasing pay rate - at least one that would keep the majority of wage earners (tax payers) in pace with inflation. Inflation has had peaks and valleys, but it has generally trended higher than wage increases. The income gap has only exacerbated this discrepancy.
Further, there were assumptions made about retirement age and life expectancy. As medicine gets better, and as lives get longer, we are paying out longer and longer. The baby boomers are going to continue to retire at an increasing rate, requiring more and more money. While Social Security benefits remain relatively fixed (with periodic cost of living adjustments), the number of people drawing from it, and the length of time they need it, is increasing.
Finally, assumptions about lifestyle were made. It was assumed that folks at retirement age would have their house paid for. That there would be very little personal debt. That due to poor health/finances, the elderly would prefer to sit on the front porch in the rocker and not really do much. And that the children of the elderly would help contribute to the finances of the elderly. None of this seems to be the case. Retiring folks still continue to carry a lot of debt. They are active and have expensive lifestyles. And the descendants of these folks find themselves unable (or unwilling) to contribute to helping elderly parents/grandparents because they are strapped themselves.
So, Social Security remains solvent, for now. But only just. And we are mortgaging our future to pay for the needs of today. No politician would ever discuss changing Social Security benefits. It's just not going to happen, and frankly, I don't think it should. I think the program works pretty well, it just needs to be bolstered so that it can remain valid and available.
2. Medicare/Medicaid. Growing out of the 60s era reforms, these programs to address health care concerns of the poor and elderly have grown to represent almost $835 billion in Federal spending. If there are failings with this program they lie not in its funding, but in the health care industry itself. It is too expensive to be sick. There is just no other way to say it. Health care reform needs to take place, in everything from the way we eat/exercise to the way we handle hospice care. The folks working in the health care industry - those actually providing the care, that is - are heroic and valiant. But there is a whole industry relating to the financing of health care which provides no value and yet draws much off the availability of funds. Obamacare is a good step in the right direction - at least we have something we can talk about. I personally don't think it goes far enough, and I look for the day when there is no payment due at point of service for anyone in any condition. Going to the hospital should never be a concern regarding ability to pay.
3. Defense spending. Also about $700 billion. That's more than the next 20 countries, combined. Seven times larger than the next closest (China). I understand that the Constitution provides a mandate to plan for the common defense. But one wonders when enough is enough. This seems a relatively easy place to find long lasting cuts.
4. Discretionary spending. Technically, the Defense budget represents discretionary spending, but it is not lumped in with this section because it is so large as to be easily broken out as a category by itself. Discretionary spending is things like Big Bird (PBS/NPR), housing, transportation, the Farm Bill (food stamps), etc. There's a lot. This is where the highly-touted and much-maligned earmarks come into play. This represents about $650 billion in expenditures. There is no doubt money which can/should be saved here, but it will be difficult to weed through everything that falls into this budget and remove everyone's pet project.
5. Other mandatory spending. The US has commitments to our citizens and to other countries. These expenditures are about $450 billion.
6. Debt service. Interest payments total about $225 billion. This is not used to pay down the debt - just interest payments.
So, how do we pay for all of this? Well, we're not. We are paying for a lot of it, but the deficit continues to increase. Most of the debt is held by the federal government itself. We sell bonds to whomever wants to buy them - even other federal holdings groups can buy bonds. This allows them to attain securities and interest that are incredibly secure (the T-bill being the guaranteed federal rate of return). This guarantee and security makes them attractive to lots of folks - from mutual funds to state/municipalities to pension funds. And, of course, to other governments as well. About 1/3 of our debt is owned by other countries. This is both good and bad. It seems on the surface that we are budgeting/mortgaging our debt for programs like Sesame Street to China (which holds roughly $750 billion in our T-notes). But that money is fungible, and it is quite spurious to say that we are going in debt to China to pay for Big Bird. It is as easy to say that China is paying for all of our military budget. Or our health care. Or Social Security. Having a foreign competitor so heavily invested in the US government is not problematic except from a nationalist point of view. Their money is just as good as anyone else's. And having them buy in to the continued success of the United States bolsters diplomacy and continued cooperation on issues of economy, defense, and other matters of mutual concern.
So, that was fairly rambly... I'm not sure what the take-away is from all of that. It's just been on my mind. On the surface, it's fairly easy: we have certain values as a society. These values impel us to enact legislation to guarantee that the quality of life we enjoy continues. We have expensive values, though, and we need to determine if one of these values is fiscal responsibility at the hazard of reducing expenditures for other things of value.
Still here?
Ok. Thanks. :)
This morning I've been thinking about the debt in the United States. The current budget in the US is a complex thing, but to (perhaps overly) simplify:
1. Social Security. We pay a lot for Social Security each year - more than we do any other single expenditure. Social security itself is a complex thing. Instituted back in the FDR administration as a way of providing for elderly/retiring folks, as well as for those who are permanently disabled, and for those who are temporarily unemployed. The program is relatively simple to understand - those who are currently working pay into a pool from which the retired, etc. draw. As long as the number of people pouring into the pool is larger than those drawing from it, everything is fine.
Social Security was based on a number of assumptions, though, that have not proven to be true. The biggest impact has to do with the number of children born. It seems perhaps a little strange to consider, but people my age (generation X) are part of a dearth of babies born in the wake of the baby boom. Thus, the ratio of people pouring into the pool to people drawing from the pool is now about 3:1, down from 5:1 in 1960, and headed to an estimated low of around 2:1 in 2030. At that point, the ratio should even out. But the birth rate continues to be low, and it's unclear that the number of employed will ever be like it was when the initial assumptions and targets were made.
Another assumption is an increasing pay rate - at least one that would keep the majority of wage earners (tax payers) in pace with inflation. Inflation has had peaks and valleys, but it has generally trended higher than wage increases. The income gap has only exacerbated this discrepancy.
Further, there were assumptions made about retirement age and life expectancy. As medicine gets better, and as lives get longer, we are paying out longer and longer. The baby boomers are going to continue to retire at an increasing rate, requiring more and more money. While Social Security benefits remain relatively fixed (with periodic cost of living adjustments), the number of people drawing from it, and the length of time they need it, is increasing.
Finally, assumptions about lifestyle were made. It was assumed that folks at retirement age would have their house paid for. That there would be very little personal debt. That due to poor health/finances, the elderly would prefer to sit on the front porch in the rocker and not really do much. And that the children of the elderly would help contribute to the finances of the elderly. None of this seems to be the case. Retiring folks still continue to carry a lot of debt. They are active and have expensive lifestyles. And the descendants of these folks find themselves unable (or unwilling) to contribute to helping elderly parents/grandparents because they are strapped themselves.
So, Social Security remains solvent, for now. But only just. And we are mortgaging our future to pay for the needs of today. No politician would ever discuss changing Social Security benefits. It's just not going to happen, and frankly, I don't think it should. I think the program works pretty well, it just needs to be bolstered so that it can remain valid and available.
2. Medicare/Medicaid. Growing out of the 60s era reforms, these programs to address health care concerns of the poor and elderly have grown to represent almost $835 billion in Federal spending. If there are failings with this program they lie not in its funding, but in the health care industry itself. It is too expensive to be sick. There is just no other way to say it. Health care reform needs to take place, in everything from the way we eat/exercise to the way we handle hospice care. The folks working in the health care industry - those actually providing the care, that is - are heroic and valiant. But there is a whole industry relating to the financing of health care which provides no value and yet draws much off the availability of funds. Obamacare is a good step in the right direction - at least we have something we can talk about. I personally don't think it goes far enough, and I look for the day when there is no payment due at point of service for anyone in any condition. Going to the hospital should never be a concern regarding ability to pay.
3. Defense spending. Also about $700 billion. That's more than the next 20 countries, combined. Seven times larger than the next closest (China). I understand that the Constitution provides a mandate to plan for the common defense. But one wonders when enough is enough. This seems a relatively easy place to find long lasting cuts.
4. Discretionary spending. Technically, the Defense budget represents discretionary spending, but it is not lumped in with this section because it is so large as to be easily broken out as a category by itself. Discretionary spending is things like Big Bird (PBS/NPR), housing, transportation, the Farm Bill (food stamps), etc. There's a lot. This is where the highly-touted and much-maligned earmarks come into play. This represents about $650 billion in expenditures. There is no doubt money which can/should be saved here, but it will be difficult to weed through everything that falls into this budget and remove everyone's pet project.
5. Other mandatory spending. The US has commitments to our citizens and to other countries. These expenditures are about $450 billion.
6. Debt service. Interest payments total about $225 billion. This is not used to pay down the debt - just interest payments.
So, how do we pay for all of this? Well, we're not. We are paying for a lot of it, but the deficit continues to increase. Most of the debt is held by the federal government itself. We sell bonds to whomever wants to buy them - even other federal holdings groups can buy bonds. This allows them to attain securities and interest that are incredibly secure (the T-bill being the guaranteed federal rate of return). This guarantee and security makes them attractive to lots of folks - from mutual funds to state/municipalities to pension funds. And, of course, to other governments as well. About 1/3 of our debt is owned by other countries. This is both good and bad. It seems on the surface that we are budgeting/mortgaging our debt for programs like Sesame Street to China (which holds roughly $750 billion in our T-notes). But that money is fungible, and it is quite spurious to say that we are going in debt to China to pay for Big Bird. It is as easy to say that China is paying for all of our military budget. Or our health care. Or Social Security. Having a foreign competitor so heavily invested in the US government is not problematic except from a nationalist point of view. Their money is just as good as anyone else's. And having them buy in to the continued success of the United States bolsters diplomacy and continued cooperation on issues of economy, defense, and other matters of mutual concern.
So, that was fairly rambly... I'm not sure what the take-away is from all of that. It's just been on my mind. On the surface, it's fairly easy: we have certain values as a society. These values impel us to enact legislation to guarantee that the quality of life we enjoy continues. We have expensive values, though, and we need to determine if one of these values is fiscal responsibility at the hazard of reducing expenditures for other things of value.
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