Talking Trillions by Jonathan Clements
Focus on the causes, not the symptoms.
There’s been a heap of handwringing this year over both federal government borrowing and possible cuts in Social Security benefits, and the current budget bill before Congress is only exacerbating those fears. But I worry folks are focusing on the wrong things.
As Adam Grossman noted recently, the federal government collects $5 trillion in revenue each year and spends $7 trillion. Why? You might point the finger at Medicare, Medicaid and Social Security, which account for almost half of federal spending.
But why do these three programs cost so much? You could rail about fraud or overly generous benefits. But the reason is far simpler: America is getting older, and that’s driving up the cost of these three programs. Two not-so-fun facts: Nearly half of Medicaid spending is devoted to seniors and those with disabilities, and Medicaid covers more than 60% of nursing home residents.
What about making spending cuts elsewhere? If defense spending, interest on government debt and programs like Social Security, Medicare and Medicaid are off limits, that leaves just 15% of federal spending available for possible cuts.
Meanwhile, there are lots of complaints about tax cheats, along with complaints about tax breaks that only benefit low-income households, or hedge funds, or college borrowers. But again, there’s a much simpler explanation for skimpy government tax revenue: When folks retire, they no longer pay Social Security payroll taxes, and their income-tax bill also typically declines. A third of federal government revenue comes from payroll taxes, and more than half from individual income taxes.
In other words, the widening of the federal budget deficit is a symptom of a larger issue: the aging of America, which is leaving us with fewer workers and more folks dependent on the goods and services they produce.
The aging of America can also partly explain inflation and our persistent trade deficit. If we have fewer Americans producing goods and services, it’s more likely that demand will outstrip supply, pushing up consumer prices and prompting companies to import even more to satisfy the demands of U.S. consumers.
And let’s not forget the silliness of the Social Security trust fund, which is merely an accounting ploy, where Uncle Sam takes money out of one pocket and puts it in another. The trust fund’s depletion is, of course, another symptom of our aging population.
But its shrinking, by itself, shouldn’t be cause for alarm. After all, when the trust fund cashes in some of its special Treasury securities, where do you think the Treasury Department gets the necessary money? Social Security has always been a pay-as-you-go system, where this year’s benefits are paid with this year’s tax revenue and this year’s borrowing—the same way the government pays for everything else. That said, it’s conceivable that one day Congress might use the emptying of the trust fund as a cudgel to force through cuts in Social Security benefits.
What’s the solution to all this? As I’ve argued before, the answer isn’t to raise taxes or slash spending, but rather to use tax incentives to make it attractive for folks to stay in the workforce for longer, while also encouraging immigration.
But as you follow the debate over this year’s budget bill, don’t expect to hear such things mentioned. It strikes me as strange, but it seems Congress would prefer to quibble over tax rates and spending cuts, rather than ease the need for both by expanding the working population. Are you happily retired? You may hate the idea of ever holding down a job again, but—for the sake of your Social Security check, your tax burden and more—you should hope and pray that we find a way to persuade those in their 60s to work just a few years longer.
Or, as they say, we can do this the easy way or we can do it the hard way. If we don’t persuade folks to stay in the workforce for longer, we’ll end up in the same place, thanks to financial bullying. Folks may find themselves compelled to work longer—or to return to the workforce—because of some combination of higher consumer prices, higher taxes, and cuts to Social Security, Medicare and Medicaid. Doesn't that sound like fun?
There’s been a heap of handwringing this year over both federal government borrowing and possible cuts in Social Security benefits, and the current budget bill before Congress is only exacerbating those fears. But I worry folks are focusing on the wrong things.
As Adam Grossman noted recently, the federal government collects $5 trillion in revenue each year and spends $7 trillion. Why? You might point the finger at Medicare, Medicaid and Social Security, which account for almost half of federal spending.
But why do these three programs cost so much? You could rail about fraud or overly generous benefits. But the reason is far simpler: America is getting older, and that’s driving up the cost of these three programs. Two not-so-fun facts: Nearly half of Medicaid spending is devoted to seniors and those with disabilities, and Medicaid covers more than 60% of nursing home residents.
What about making spending cuts elsewhere? If defense spending, interest on government debt and programs like Social Security, Medicare and Medicaid are off limits, that leaves just 15% of federal spending available for possible cuts.
Meanwhile, there are lots of complaints about tax cheats, along with complaints about tax breaks that only benefit low-income households, or hedge funds, or college borrowers. But again, there’s a much simpler explanation for skimpy government tax revenue: When folks retire, they no longer pay Social Security payroll taxes, and their income-tax bill also typically declines. A third of federal government revenue comes from payroll taxes, and more than half from individual income taxes.
In other words, the widening of the federal budget deficit is a symptom of a larger issue: the aging of America, which is leaving us with fewer workers and more folks dependent on the goods and services they produce.
The aging of America can also partly explain inflation and our persistent trade deficit. If we have fewer Americans producing goods and services, it’s more likely that demand will outstrip supply, pushing up consumer prices and prompting companies to import even more to satisfy the demands of U.S. consumers.
And let’s not forget the silliness of the Social Security trust fund, which is merely an accounting ploy, where Uncle Sam takes money out of one pocket and puts it in another. The trust fund’s depletion is, of course, another symptom of our aging population.
But its shrinking, by itself, shouldn’t be cause for alarm. After all, when the trust fund cashes in some of its special Treasury securities, where do you think the Treasury Department gets the necessary money? Social Security has always been a pay-as-you-go system, where this year’s benefits are paid with this year’s tax revenue and this year’s borrowing—the same way the government pays for everything else. That said, it’s conceivable that one day Congress might use the emptying of the trust fund as a cudgel to force through cuts in Social Security benefits.
What’s the solution to all this? As I’ve argued before, the answer isn’t to raise taxes or slash spending, but rather to use tax incentives to make it attractive for folks to stay in the workforce for longer, while also encouraging immigration.
But as you follow the debate over this year’s budget bill, don’t expect to hear such things mentioned. It strikes me as strange, but it seems Congress would prefer to quibble over tax rates and spending cuts, rather than ease the need for both by expanding the working population. Are you happily retired? You may hate the idea of ever holding down a job again, but—for the sake of your Social Security check, your tax burden and more—you should hope and pray that we find a way to persuade those in their 60s to work just a few years longer.
Or, as they say, we can do this the easy way or we can do it the hard way. If we don’t persuade folks to stay in the workforce for longer, we’ll end up in the same place, thanks to financial bullying. Folks may find themselves compelled to work longer—or to return to the workforce—because of some combination of higher consumer prices, higher taxes, and cuts to Social Security, Medicare and Medicaid. Doesn't that sound like fun?
The post Talking Trillions by Jonathan Clements appeared first on HumbleDollar.
No comments have been added yet.
