Last month a report to Social Security trustees was released. Buried in the fine print is some bad news, as Boston University economics professor Laurence Kotlikoff writes in the New York Times:
Dig deep into the appendix of the most recent Social Security Trustees Report…and you’ll find that the program’s unfunded obligation is $24.9 trillion “through the infinite horizon” (or a mere $10.6 trillion, as calculated through 2088). That’s nearly twice the $12.6 trillion in public debt held by the United States government. …
Social Security’s hidden debt is just a small part of the story. Two weeks ago, the Congressional Budget Office released its annual long-term budget outlook. The good news: This year’s deficit — about 3 percent of gross domestic product — is the smallest since 2007 and way down from the peak of almost 10 percent in 2009. The bad: Without action, the deficit will grow “notably larger” starting in about four years, a result of our aging population, rising health costs and the new subsidies for health insurance.
Even worse, the budget office raised what’s called the alternative fiscal scenario, the most realistic projection of fiscal outcomes absent major policy changes. Based on these estimates, I calculate that the “fiscal gap” — a yardstick of total government indebtedness that I’ve worked on with the economists Alan J. Auerbach and Jagadeesh Gokhale — was $210 trillion last year, up from $205 trillion the previous year. Thus $5 trillion was the true deficit.
The fiscal gap — the difference between our government’s projected financial obligations and the present value of all projected future tax and other receipts — is, effectively, our nation’s credit card bill. Eliminating it, would require an immediate, permanent 59 percent increase in federal tax revenue. An immediate, permanent 38 percent cut in federal spending would also suffice. The longer we wait, the worse the pain. If, for example, we do nothing for 20 years, the requisite federal tax increase would be 70 percent, or the requisite spending cut, 43 percent.
Estimates of federal government’s unfunded gap vary, but experts agree on one thing: the feds should be forced to come clean about just how much debt they’re keeping off the books. A plan to do just that has been introduced in Congress, the Inform Act. If passes, required annual reports to Congress would include analyses of the real fiscal impact of major proposed changes to legislation.
The Inform act is endorsed by more than 1,000 economists and former government officials from both sides of the aisle who want greater accountability and transparency in government. Kotlikoff explains that such openness is about much more than economics:
What we confront is not just an economics problem. It’s a moral issue. Will we continue to hide most of the bills we are bequeathing our children? Or will we, at long last, systematically measure all the bills and set about reducing them?
Americans’ incomes are taxed enough as it is, at more than 30 percent on average. In fact, according to one recent global survey of 34 countries the United States posted some of the highest tax increases over the past decade.
There’s no way to tax ourselves onto a solid fiscal footing. In fact, if Kotlikoff’s projections are correct, the necessary 59 percent permanent tax increase just to break even now would mean Americans would have be sending roughly half of their paychecks into the federal government—more than several European countries, including Austria, France, Germany, and even Greece.
Countries such as Chile have private retirement accounts that yield returns six times higher than anything the government ever offered, and allowing younger workers to privately invest their earnings is a better long-term solution.
In the meantime, transparency about Social Security is a necessary first step toward ending dependency on government now and throughout our retirement years.