Edward Lotterman: The real debt and deficit: They’re not what you think | Edward Lotterman's columns | Idaho Statesman
The role of Social Security and Medicare in our nation’s ongoing fiscal problems is widely misunderstood and often misrepresented. One often hears that the growth of spending on big entitlement programs, including Social Security and Medicare, must be reduced. It is true. But it also ignores the fact that, up till now, at least, those two specific programs have not added to annual budget deficits or the national debt.
Instead, taxes paid into these two programs have exceeded spending by a wide margin for decades, reducing the annual budget deficits and cumulative national debt as they are commonly tabulated.
The fact that taxes have been less than spending in all categories except Social Security and Medicare is why the national debt has mushroomed over the past 30 years. If we do not address that fundamental problem, we are not going to solve anything.
This is not to say Social Security and Medicare are on sound financial footings. They are not, and they require major changes, especially Medicare. But these are problems looking forward and not why our national debt is a problem right now.
To understand the fundamental problem, it is useful to separate the finances of Social Security and Medicare from the rest of the federal government. Add up all federal revenues, minus those paid as FICA for Social Security and Medicare. Then add up all Federal spending, except on those same programs. Call the difference the government’s “general funds.” This is not a term the government itself uses, and there are other details that enter in, but this is a useful starting point to look at fiscal problems outside of Social Security and Medicare.
You will find that spending from these “general funds” has exceeded revenues in 52 of the past 60 fiscal years. Such deficits bounce around from year to year, particularly as a result of the business cycle. They averaged less than 10 percent of general spending in the 1950s and 1960s but grew to an average of 16 percent in the 1970s. In the 1980s, these deficits average more than 26 percent of all general fund spending. In other words, one-fourth of all dollars spent for purposes other than Social Security and Medicare in the 1980s already came from borrowing.
What is remarkable is how this dropped in the 1990s. Yes, the average for the decade remained near 15 percent. But starting from more than 30 percent in Fiscal Year 1992, the fraction of general spending that was borrowed dropped eight years in a row. By 1997, this general fund deficit was only 0.6 percent of outlays. Fiscal years 1998 through 2001 showed surpluses, the first time since the Eisenhower administration.
It is remarkable that in this time of handwringing over the intractability of deficit spending, we forget that five of the eight times since World War II that general fund revenues exceeded spending were only a decade ago. One point is important here. What I have referred to as “general fund” revenues and outlays leaves out some details. There are programs beside Social Security and Medicare that get money from their own dedicated taxes. The highway and airport trust funds fall into this category.
If you also separate out these revenues and outlays, deficits in true “general fund” accounts become even larger over much of the period. But these transportation accounts are minor compared with those funded from FICA payroll taxes.
The upshot is that over the past 40 years, spending has outpaced tax revenues in categories other than Social Security, Medicare and transportation, and that has driven increases in the national debt. The surplus revenues that accumulated in the Social Security, Medicare and transportation “trust funds” functioned to cover up the true level of deficits in the federal government’s general accounts.
This is manifest in the difference between the two measures of the national debt the government tabulates. The “gross debt” is the total of Treasury bonds outstanding. But some of those are bonds that represent lending from one pocket of the Treasury — the Social Security, Medicare and transportation trust funds just mentioned — to another, the general Treasury.
The “debt held by the public” is the amount owed to everyone outside the Treasury. This is the figure most commonly reported as the “national debt.” The difference between the “gross debt” and the “debt held by the public” is called “intragovernmental holdings.” (The trust funds just described make up nearly all of this, but there also are some minor “revolving accounts” and other details.)
As of last week, the “debt held by the public” is $9.5 trillion. The “gross debt” is $14.1 trillion. The $4.6 trillion difference represents the amount by which revenues from FICA, from federal fuel taxes and from excise taxes on airline tickets have exceeded outlays for Social Security, Medicare and transportation infrastructure. So these rubrics are not the cause of a ballooning national debt nor, so far, of current annual budget deficits. It is rather the reverse. For decades, these programs have served to cover up deficits due to general fund taxing and spending.
Looking forward, neither Social Security nor Medicare has sustainable finances for the long run. Medicare is particularly shaky. Both programs need changes that will involve both tax increases and benefit cuts. Moreover, Medicaid, which some people confuse with Medicare, is a major contributor to increasing annual general budget deficits.
But until now, Social Security and Medicare are not the cause of our fiscal difficulties. General spending exceeding general tax revenues has been the problem.
Economist Edward Lotterman teaches and writes in St. Paul, Minn. Write him at ed@edlotterman.com.
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