Priorities V – Social Security

Social Security and Medicare payments, the major American social safety net programs, account for most of the $2.45 trillion each year in mandatory spending – spending required by law. Let’s examine these in more detail.

The original theory of Social Security was as a pay-as-you-go system. Workers would put money in, and that would provide funds to pay out to retirees. In 1945 there were 41 workers paying in for each retiree receiving payouts, and the system ran a surplus. By 1960, with an aging population, that ratio had dropped precipitously to 5.1 workers per beneficiary, and now it stands at about 2.9 workers per beneficiary, and is estimated to be at about 2 workers per retiree by 2030. The system was stable at about 3 workers per retiree, but now we take in less in payroll taxes than we pay out each year.

By the way, the Social Security Trustees annual report in all its detail is available for reading or download here. 

In 1983 President Reagan, foreseeing problems in Social Security with the approaching wave of baby boomer retirements, increased the payroll tax that supported Social Security by enough to produce a surplus that would sustain Social Security for another 30 years. The surplus in the Social Security Trust Fund was, by law, require to be invested in government bonds, and as of the 2016 Trustee’s Report should support the system through 2034.  In theory there are about $2.8 trillion in the Trust Fund as of last year. Actually, there are two such funds, the Old Age and Survivors Insurance (OASI) Trust Fund to the Disability Insurance (DI) Trust Fund, but we will treat them as one.

Unfortunately that pot of money was just too tempting for Congress, and both parties have essentially raided it in ensuing years to fund tax cuts, wars in the Middle East and vote-getting social programs. Putting it in government bonds makes it sound respectable, and makes it look for accounting and political purposes like the Trust Fund has actual money in it, but in effect Congress took the money and replaced it with paper IOUs (government bonds) which can only be redeemed out of current income or current borrowing, so in effect there really isn’t any surplus real money stored up for Social Security.

So for practical purposes, Social Security is now again a pay-as-you-go system, and the system is currently projected to run a real deficit of around $84 billion per year through 2019. I say “real deficit” because politicians like to include the interest on the Trust Fund bonds as income to the program, so that it will look like it is running a surplus. But of course interest on the Trust Fund bonds also comes out of taxpayer money or government borrowing, so it really isn’t income to the Trust Fund except for accounting and political purposes.

So the real cost these days of Social Security is the approximately $84 billion per year deficit – the difference between what the government takes in in payroll taxes and what it pays out in Social Security checks each year. And we can just ignore the Trust Fund as a political accounting fiction – it is really just government bonds we will have to pay back (or default on) someday.

On the scale of other things the government spends money on, $84 billion per year to keep Social Security going isn’t too bad.  But it would be even better if the program were permanently self-funded. An increase of about 10-12% in the payroll tax, indexing the payroll tax to inflation and/or eliminating the cap on income taxed for Social Security could easily cover the current deficit, if Congress could get its act together enough to make the change.  Beyond 2019 of course, if the ratio of workers to retirees really drops to 2 or less as currently projected, larger increases in the payroll tax will be necessary.

Of course Social Security is supposed to be only a supplement to a retiree’s own savings and pensions, not a complete retirement package in itself. So tax laws that would encourage more saving for retirement, and encourage more companies to provide more generous and more portable (across jobs) pension plans would also help the problem.

Priorities IV – Infrastructure

I included infrastructure repair and improvement as one of my high priority categories for federal funding in part I of this series of posts. Infrastructure – roads, bridges, railway lines, seaports, airports, power and water and sewer systems, communication lines, and the like – are the framework that supports the entire economy. It is what allows efficient movement of raw materials to factories and finished products to markets, provides the energy and communication businesses need to run, and the facilities to move people around as they need to.

Building and repairing infrastructure is a joint local, state and federal obligation. We have neglected the American infrastructure for decades, largely because infrastructure work doesn’t generate many votes either at the local level or nationally, so it has been an easy thing to underfund so as to divert funds for things that attract more voters.

How bad are things? We built our last major airport (Denver International) in 1995, more than 20 years ago.  By comparison, China is building 66 new major airports over the next five years. An engineering survey in 2016 found 58,000 bridges in the US which are structurally deficient (ie – falling apart). Globally, the U.S. ranks 19th — behind Spain, Portugal and Oman — in the quality of its infrastructure, according to the World Economic Forum’s Global Competitiveness Report. The American Society for Civil Engineers (ASCE), in its annual Infrastructure Report Card, gave the U.S. a D+, saying we need to invest some $3.6 trillion by 2020 to upgrade our infrastructure.

We have been spending about 1.5% of our GDP on infrastructure maintenance in the past few years. Most of this comes from state and local funds, but during the economic downturn of the past decade states and local authorities have had to cut back, especially since many cannot run deficits by law (something the federal government could stand to have imposed on it). Many states and cities are also in financial trouble because they have accumulated huge pension obligations for their public workers, and so simply don’t have funds for infrastructure work.

Once again the argument for including infrastructure repair and upgrading in my list of top priorities for federal funding is economic – the economy drives and funds everything else we want.  Poor infrastructure costs the economy, so it is a high priority to attend to it.

Priorities III – Science

In part I of this series I included federal support of science among my highest priority items – things the federal government absolutely ought to fund each year. Why science?

Technological advances are what is fueling much of America’s prosperity these days, and science is what drives technological advances. The federal government doesn’t actually put much finding into science – something around $150 billion per year (about 3.5% of the federal spending), split roughly evenly between defense and non-defense science. Defense R&D is mostly applied science.

There is a difference between basic science and applied science. The first deals with trying to understand nature, while the second deals with using that knowledge to try to develop commercial or military applications. In general governments have proven to be terrible at picking winners and losers in applied science, as the Obama administration showed once again with its failed attempts to fund development of solar panels. Private enterprise is much better at this – they are more realistic and less ideology-driven than government in their assessments of feasibility and likely success, and also more efficient at using the funds. And in fact much of the military R&D is actually done by private corporations. So applied science is better left to private enterprise, though there are a few quasi-government organizations, like the National Institutes of Health, that are the exception.

But basic science is the feedstock for economic growth. It returns more economic growth for dollars invested than just about any other government program. But private corporations have little or no incentive to do basic science – the money is to be made in applied science; using science to produce new or improved products that have a profitable market in the near-term.  So it makes sense for the federal government to support basic science as a way to ensure the long-term health of the economy, and therefore the long-term health of the tax revenues needed to pay for everything else.

That is why it is high on my proposed priority list.

Priorities II – The Military

The inescapable conclusion of my previous post is that we as a nation simply can’t afford everything we are currently funding unless voters will accept a hefty tax increase of at least 20-25%, or elimination of all tax breaks (including popular things like home mortgage deductions, and medical deductions).  And I suggested a list of things which I proposed were the top priorities we had to fund or ought to fund, mostly to keep the economy strong so that tax receipts would stay strong.

The most controversial of those priorities, at least among some people, will be the military, on whom we spend a little over half a trillion dollars (just under $600 billion) annually. If we spent nothing at all on the military we could – just about – cover the other current discretionary spending without borrowing each year.

Now there are certainly valid but highly technical debates about HOW we spend that $600 billion. For example, are aircraft carriers really essential for the navy or are they just expensive targets these days for Russian VA-111 Shkval supercavitating torpedoes and Chinese Dong-Feng 21 carrier-killer anti-ship cruise missiles? Are we better off with fewer very capable but very expensive manned F-35 fighters or with many more inexpensive unmanned drone fighters and cruise missiles? These are interesting and worthwhile debates, but I would argue that whatever the outcome of these debates we as a nation HAVE to spend to have a strong military, and the cost - however we apportion it – is likely to be more or less what we are spending now.

Could we do it for less? Sure, we could probably cut $50-100 billion or so a year out of the budget if anyone could figure out a way to prevent members of Congress from keeping open military bases in their district that the Pentagon says they don’t need, or getting contracts in their districts for weapons that the Pentagon hasn’t asked for, or get the military procurement system under control so that new weapons systems don’t always overrun their budgets by a factor of two or three or more.  Lots of luck on that!

First, why do we need a strong military:

1.      A strong military is like an insurance policy. The primary purpose of a strong military is to avoid having to go to war; to encourage potential opponents to estimate that they could not win a war with us, so don’t bother trying. As Plato said centuries ago and history has proven time and time again, “If you want peace, prepare for war”. And unless the military is strong enough to deter aggression the money spent on it is wasted. Yes, it is expensive to maintain a strong military, but far, far more expensive to have to fight a war and incalculably more expensive to lose that war.

2.      Our economy is highly dependent on control of the sea, and that requires a strong navy. In 2016 ship traffic carried $1.5 trillion in US cargo to and from our worldwide trading partners, and much of that cargo was components or raw materials needed by US manufacturing, or outgoing trade with foreign markets that support US companies. More than half of the world’s ship cargo passes through the South China Sea, a major choke point that would be easy for an opponent with enough naval power to close off.  Disruption of this sea trade would decimate the US and the world economy, just as Germany nearly drove Britain to bankruptcy and starvation during World War II by disrupting their sea trade.

3.      Optimists might argue that we have no obvious opponents, so why spend so much on the military. How trustworthy is that estimate? China, already with the second largest navy in the world, is building warships as fast as it can, aiming for a 350 ship navy by 2020 (we have 274 deployable warships right now), even while it makes claims on the whole South South China Sea and builds fortified islands there. Russia is far behind us in military power, but has quite enough to be troublesome on its own borders, and of course is a nuclear power. And then we have North Korea, madly building nuclear weapons and developing long range missiles. I think the optimists are a bit unrealistic.

Second, why it is so expensive:

1.      As Secretary of Defense Donald Rumsfeld correctly noted,  “…you go to war with the army you have, not the army you might want or wish to have at a later time “.  In the days of horses and marching armies wars used to be slow-motion affairs, with time to mobilize and train and arm troops.  Not today. Wars occur quickly, and require enormous stocks of munitions and supplies. Today a military that isn’t ready and constantly trained for immediate use is a military that is of no use. But it is expensive to maintain and constantly train a standing army, navy and air force.

2.      Many people don’t understand how expensive it is to maintain forward positions – troops in Europe and Asia, ships and aircraft deployed around the world where they can get to trouble spots in time. For example, it takes about 4-4½ ships just to keep one ship on station somewhere. The rest are in transit to or from the station, or in maintenance, or in training.

3.      Many people don’t understand that building today’s complex weapon systems - ships, aircraft, etc – involves tens of thousands of skills and specialized facilities (shipyards, aircraft factories, etc).  Stop building them for a few years and those skills and facilities are gone and might take a generation or more to recover with new hires and new factories/shipyards. More than that, today’s complex weapons require highly trained people to operate them, and the constant training to keep them proficient wears out the equipment, which then needs to be constantly replenished and replaced.

So I would argue that military spending is one of the essential things the government needs to do, not just for the nation’s safety, though that is important too, but to safeguard the American economy, and the world economy America is dependent on. And given the way Congress works and the inefficiency of the government, it will probably cost about what we are now spending.  In fact, we probably need to boost the spending for a few years to replace all the munitions we have used and equipment we have worn out in our fruitless Middle East wars over the past decade.

Priorities I – Getting Real

Like many other people, I am unhappy that the Trump administration proposes to reduce or eliminate federal funding for things like the Arts and National Parks, among other things. But it has gotten me thinking about priorities. For decades now the US government has been spending more than it takes in, so that by now we have a national debt of more than $20 TRILLION dollars, more that the entire yearly GDP of the whole nation, and future obligations (Medicare, Social Security, Government pensions, etc) are estimated at about $127 TRILLION, far more than we can ever hope to pay out.  Steins Law applies here; "If something cannot go on forever, it will stop."

Clearly as a nation we have been spending well beyond our means. There are lots of “nice to haves”, including the Arts and National Parks, but can we really afford them?  It seems to me the way to answer that question is to rank government activities in some sort of priority order, and then go down the list until we run out of annual receipts.  Anything below that line, however nice it would be, simply doesn’t get funded, unless we, the voters, are willing to accept tax increases high enough to move the cutoff line further down.

Let’s start by taking stock of where we are. There is a good site here that provides the figures. Here is the distribution of Federal spending for 2015:

 The first thing that just pops out is that REQUIRED spending (Blue Interest on Federal Debt and green Mandatory spending) dominates.  In 2015 the Federal government took in $3.18 trillion dollars in taxes and fees, 81% of it from income taxes and payroll taxes and 11% from corporate taxes.  How much does that cover?

$229 billion (6%) goes to pay interest on the national debt.

$2.45 trillion (64.6%) goes for mandatory spending. Social Security accounts for about half of that (48.5%) and Medicare most of the rest (38.4%).

That leaves half a trillion dollars ($527 billion to be more accurate) in income to cover $1.11 trillion in discretionary spending, which includes the military (about $600 billion, or 53.7% of discretionary spending), and we haven’t even allocated any money to pay back the debt.

Clearly something has to give. We can’t keep spending more than we take in forever. One solution, of course, would be to raise taxes enough (about 20%) to cover the deficit,  Or we could eliminate all tax breaks (worth about $1.22 trillion), which would more than cover the discretionary spending and even put a little aside to begin to pay back the debt.

So now let’s rank spending in priority order. Everyone will have their own priority order no doubt, depending their passions, their politics and their ideology. But let me suggest an order for at least the top of the list – the most important stuff the government ought to or has to fund  - that most of us might agree on.  As I have argued before, the economy is the engine that drives and funds everything else, so it gets top billing in my list. Here is my suggested starting priority list:

1.      Debt obligations - interest on the debt and pay down the debt. We must do this.

2.      Infrastructure repair and updates – essential to the economy

3.      Basic science – essential to the economy (~3.5% of discretionary spending)

4.      Transportation – essential to the economy (~2.7% of discretionary spending)

5.      Social Security – but reduce payments and increase payroll taxes

6.      Medicare – but reduce payments and increase contributions

7.      Military – (a) to keep us safe, not from terrorists but from full-scale war, and (b) to preserve the economy.  I’ll talk more about this in part II of these blogs.

That’s it. Those 7 things, more or less, will eat up all the current annual federal receipts, and at that it includes touching the political third rail of Social Security and Medicare. Pretty much anything else is a “nice to have but we can’t afford it” unless people are willing to pay a lot more taxes.

That is reality.

Who reads fake news?

The BBC website this morning has a fascinating article entitled The rise of left-wing, anti-Trump fake news. The observation that fake news is not just a right-wing phenomena doesn't surprise me, but the fact that it is appears to be largely the college educated on the left wing, and the high income earners on the right wing, that attend to fake news is unexpected.  One might have expected it would be the more uneducated who were the more susceptible.  Perhaps the "deplorables" have a better sense of reality after all  than the rest of us.

Dilbert