America's dubious debt wish

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Six months ago in this space I criticized a plan to eliminate remaining state income taxes on Social Security benefits. I had then just begun receiving Social Security benefits myself, and hoped to demonstrate some gratitude.

I also aimed to make the point that in the face of a rapidly aging population and an unsustainable, largely ignored budget mess in Washington, one of the last things America needs just now is "more encouragement for us old-timers to believe that our interests are sacrosanct in a way other generations' are not."

That's because Social Security, still the federal government's largest spending program (though Medicare, the 65-plus health care program, is fast overtaking it), is simply going to have to be part of efforts one day to pull the federal government out of its long-accelerating debt spiral.

In the end, in a rare fit of restraint this year, DFL majorities in the Minnesota Legislature stopped short of eliminating state income tax on all Social Security benefits. But they expanded the exemptions far enough to confirm that the political odds are long against America's leaders ever resisting the ire of elders and coming to terms with fiscal realities until some crisis is upon us.

Whether states tax Social Security benefits is a relatively minor matter. But along with many better-qualified worriers, I have been writing about the altogether serious need to shore up Social Security's basic finances almost as long as I've been contributing to the system. Now that I'm on the receiving end of this multigenerational bargain, I've noted with more acute interest than ever the Congressional Budget Office's (CBO's) latest Long-Term Projections for Social Security, released at the end of June along with its 2023 Long-Term Budget Outlook.

But frankly, it's not mature audiences so much as younger Americans who need to face the sobering facts these reports contain.

Essentially, the CBO, well respected and nonpartisan, now accepts that nothing is going to be done to repair Social Security's financial malfunction either prior to or following the long-predicted, long-warned-of, "exhaustion" of the system's Trust Fund balances, now anticipated to arrive in 2033, just 10 short years from now.

In a sense nothing practical will change when the Trust Fund surplus runs out. Social Security as a whole won't become "insolvent" as is often claimed. But what will finally become clear is the bankruptcy of the claim that the system and all its promises are wholly self-financing and Social Security beneficiaries have only gotten their own their contributions back.

A little explanation: The much-discussed, little-understood Social Security "Trust Funds" are in fact merely accounting entries. Employee and employer payroll taxes have always flowed directly into the general federal treasury. The revenues have been credited to the Trust Funds.

For decades, until the last few years, Social Security taxes produced surpluses above and beyond the amounts needed to pay current retirees' benefits. Special interest-bearing government bonds were issued to account for those surplus dollars, meaning they were also credited to the Trust Funds, along with interest they earned, building up large reserves. Meanwhile, the extra money got spent elsewhere.

Through most of the past decade or so Social Security has been spending down those reserves to make ends meet, because Social Security's own current tax revenues are no longer sufficient to pay all the benefits promised to retirees. The reserves will be gone — exhausted — by 2033.

What then? The CBO explains that unless, and until, Congress and the president do something to change the situation, "two federal laws would come into conflict" on the day the Trust Fund surpluses were exhausted. The Social Security Administration would be legally obligated to continue paying currently required benefits, but also legally forbidden to spend more money than it had on hand.

"It is unclear what specific actions" would follow, the CBO writes in its best bloodless bureaucratic style.

In fact, it's not altogether mysterious. If Social Security were to pay out only the benefits its own taxes would finance come 2033, all beneficiaries would suffer a sudden benefit cut of about 25%. Given how dependent many millions of U.S. seniors are on their Social Security income, that is not likely to happen. Indeed, as the reality of this possibility finally begins to come into focus in the years just ahead, the political pressure to theatrically make damned sure it doesn't happen is likely to mount.

At all events, the CBO, ever realistic about Washington's ways, assumes in both its Social Security projection and its broader budget projections that for decades to come "spending on Medicare and Social Security continues as scheduled regardless of the amounts in those programs' trust funds ... ."

In short, the federal government will just keep on borrowing whatever is needed.

Reassuring as this may sound to some of us, it is all part of the reason "the United States faces a challenging fiscal outlook," as the CBO mildly puts it to introduce its overall budget outlook. On its present track, federal debt relative to the size of the economy "would exceed any previously recorded level" within the next 30 years and still "be on track to increase further," the number crunchers say.

Annual Social Security spending will rise above 6% of the entire economic output of America over that period and Medicare spending will exceed 7%. Interest payments on accumulated debt would be 6.7% of U.S. gross domestic product by 2053, more than twice as high a debt service burden as the nation has ever recorded.

Altogether, federal spending in the wake of supersized pandemic stimulus has now reached about 25% of GDP and seems destined to stay there — well above the 21% average over the past 50 years, not exactly an era of tightfisted austerity.

All this, of course, assumes that our politicians do nothing to increase the federal government's red ink further in the years ahead — no new tax cuts, no new spending extravaganzas, no debt relief or free college for all, no expansions of Social Security or Medicare. Make your own list.

A confident school of thought has arisen, of course, arguing that debt doesn't really matter for a government whose currency and creditworthiness is considered sound by the rest of the world. The actions, if not the words, of our leaders in both parties suggest they've studied at that school. The CBO analysts evidently have not.

"High and rising debt" at the level they anticipate, would have "far-reaching ... consequences," the CBO says, including stifling interest rates and slower economic growth; "elevated risk of a fiscal crisis ... in which investors lose confidence in the U.S. government's ability to service ... its debt," causing an inflationary spiral and other unforeseeable "disruptions"; eroding confidence in the U.S. dollar as "the dominant international reserve currency"; and a loss of flexibility for policymakers to respond to emergencies or changing needs.

One only wishes the CBO, or someone, could forecast how many such disagreeable consequences will have to be endured, for how long and at what intensity, before American leaders will take responsible action on the nation's finances.