Only your closest friends will stop you before you leave the house in an unflattering outfit. Maybe it takes a grown woman without an agenda to tell you to truth about US debt.
Here's an unbiased look. Please refrain from the temptation to shoot the messenger.
All links are to most current US government promulgated reports.
The Budget
We're spending $3.5 trillion dollars, and taking in $2.1 trillion in revenue. The $1.4 trillion we're spending beyond our means is our annual deficit, and is added to all prior year deficits. The total of all deficits as of last September 30 is $11.9 trillion. That amount, now just over $13 trillion, is our national debt.
Expenses
Almost 40% ($1.35 trillion of our $3.5 trillion total annual expense) is Social Security, Medicare and Medicaid.
All the money we spend on national defense is is just over 15.5%, and rises to 22%, when including all other security programs. Those two items are nearly 2/3 of what we spend.
The other third is non-security and other mandatory programs, like education, justice, commerce, state department and the like.
Income
Individual income taxes are just over 40% of all taxes. Corporate taxes are almost 7%.
Social security, medicare and unemployment taxes are the biggest chunk - just over 42%. By the way, if you think your social security taxes are put into the so-called "Social Security Trust Fund," think again. There is no trust fund. We spend that money. But we promise to pay you back. That promise is almost 40% of our annual expense.
Personalizing the Budget
I can see your eyes rolling back in your head. No one can think in trillions. So, let's put this budget in terms of your community. To keep the numbers easy, we'll say that your community spends $100,000 per year, and expenses are split up just like our Federal budget.
$38,500 is put aside for old age benefits. About 13% of your population is 65 and older.
$29,700 goes to education, agriculture, commerce, energy, justice, labor and the like..
$22,000 is for security. You live in a dangerous area, and you've been attacked within the last decade.
$5,300 is interest on loans you've taken out to finance the amount you've spent above your revenues in the past.
$4,300 was invested in your local banks, which nearly stopped making loans due to their bad condition last year. You've been repaid about half the amount you lent them so far.
Reviewing the Budget
Right off the bat, almost 40% of your budget is spent for old age benefits for 13% of your population. .
You may be able to cut a little here and there, but nothing is as anywhere near as significant as that expense. Even if you cut your security budget in half, it wouldn't be as much of a benefit as cutting the old age benefit by just one-third.
But you know that this is a "sacred cow." Just look at the civil unrest in Greece and Spain for an idea of what you can expect when you cut benefits that you've promised - even if you can't afford them.
The fact is, though, you can't continue to promise 40% of the budget to 13% of the population. Someone, at some point, is going to have to tell your community the truth.
The Truth
Old age benefits began during the Great Depression. At that time, US life expectancies were 60 years of age, and benefits were available at age 65. Now, US life expectancies are 77.2, and benefits are still payable at age 65. The age at which benefits are available has not moved, despite the increase in life expectancy of 27.2 years.
When old age benefits began, there were 42 workers per retiree. In 1950, there were 16. Now there are 3.3 workers per retiree.
Some Possible Solutions
1. Age at which benefits are available must be increased in relation to the increase in our life expectancy.
2. Those of us who have provided comfortably for our retirements must consider reduction, or even elimination of our benefits for the viability of the program.
3. The option for a portion of benefits to be available for young workers to invest in capital markets.
4. You decide. Those of us who are parents and grandparents have the responsibility to make tough decisions in order to keep this program viable for the next generations. Yes, we paid into the system. Yes, a promise was made. But we're paying out much more than we're taking in, and no expense is anywhere near that of Social Security, Medicare and Medicaid. It's our responsibility.
We need to acknowledge the problem and fix it.
As always, I welcome your comments and suggestions.
Showing posts with label budget. Show all posts
Showing posts with label budget. Show all posts
Thursday, June 10, 2010
Wednesday, February 17, 2010
The Most Important Financial News You Haven't Heard
Health care costs are 17% of our Gross Domestic Product, and growing at 12% per year. At this rate, in 10 years, health care will be 50% of our GDP. No health care legislation on the horizon.
The biggest contraction of GDP since the Great Depression just took place, and caused a worldwide recession. No financial reform legislation on the horizon.
This is the story that may be bigger than either of those.
I. National Debt in Perspective
You'd have to be a recluse not to have heard the Tea Party movement raving about government spending. Do they have a point?
According to the latest Congressional Budget Office report, the US will spend $1.35 trillion more than its revenues this year, slightly less than the $1.4 trillion deficit in 2009. Our accumulated deficits (plus interest), or our National Debt is $12.38 trillion.
US debt is currently 86.7% of our Gross Domestic Production, and is projected to be 94.27% by the end of this year. How does that compare to our historic levels of Debt/ GDP?
A. Post-War Years
Since 1792, our average level ratio of Debt/GDP was 28.32.
Our lowest levels were from 1835 - 1842 (less than 1%), and our highest were 1945 - 1947 (averaging 114.34%), and 1948 - 1950 (averaging just under 92%). Note that the highest years were post World War II, when fears that military spending decreases would cause another Depression subsided, as growth in housing, cold war military spending and industrial production in automobiles, aviation and electronics increased throughout the 1950s.
B. The 1960s and 1970s
In the 1960s, the Kennedy Administration increased government spending and cut taxes, but the level of Debt/GDP dropped from 67.9% in the 1950s to 45.3%.
In the 1970s, a combination of increased inflation and a stagnant economy (coined "stagflation") resulted in high unemployment, and Debt/GDP dropped to 33.7% during that decade.
C. The 1980s
Beginning the decade with a brutal recession, the Reagan Administration responded with tax cuts and spending increases, much like the 1960s. The difference was government spending for social programs was slashed, and military spending increased dramatically. During this decade, Debt/GDP rose to 42.2%.
D. The 1990s and beyond
Economic growth brought deficits down to zero in the 1990s, but a growing debt primarily due Social Security and other social programs increased Debt/GDP to 63.7%. Continued growth in social programs (including the Medicare Drug Program), the Afghanistan and Iraq wars, and the housing bubble (with its ensuing world-wide financial crisis) increased the Debt/ GDP ratio to 64.6% during the decade ended 2009.
II. US Spending by Category
National Defense 19.9%
Human Resources (Including education, training, employment, social and veteran's services) 65.2%
Physical Resources (Including energy, environment, commerce, housing, transportation and community/regional development) 8%
Net interest on National Debt 3.8%
Other Functions (Including international, science, space and technology, agriculture, justice and general government) 5.6%
Undistributed Offsetting Receipts -2.3%
Clearly, the vast majority of US spending are in Human Services (65.2%), and almost half of that spending is Medicare and Social Security. Social Security spending alone is about equal to National Defense.
Spending on Health Care, as mentioned earlier, is 17% of GDP, and is growing at 12% per year. Left unabated it will be half of our GDP in 10 years.
III. The Big Untold Story
China is no longer the largest foreign holder of US debt, having recently reduced their holdings by $34.2 billion. Japan, who now holds more of our debt than any foreign holder, also reduced their holdings by $11.5 billion. Overall, foreign holders of our debt dropped by $53 billion, the largest drop in history.
With our debt increasing, and foreign lenders less willing to buy it, the Treasury Department will now have to attract investors with higher rates of interest.
The 3.8% of our budget we use to pay interest on our debt will increase. While $136 billion may seem a paltry amount in today's vernacular, we derive absolutely no benefit from it, and it is now equal to the amount we spend on education.
With foreign governments finding our debt less attractive, the amount we spend on interest will surely increase to attract other borrowers.
We haven't had the will to fix health care costs that will be 1/2 of our total output in a short 10 years if we do nothing.
We haven't the will to enact financial reforms after the biggest recession since the Great Depression.
Will we find the will to make the sacrifices necessary to cut spending?
Warren Buffett suggested that he will pay higher taxes and forego Social Security payments, regardless of the fact that he's paid into the system all his life. Admittedly, he's a lot weathier than we are.
Nevertheless, maybe he's on to something.
The biggest contraction of GDP since the Great Depression just took place, and caused a worldwide recession. No financial reform legislation on the horizon.
This is the story that may be bigger than either of those.
I. National Debt in Perspective
You'd have to be a recluse not to have heard the Tea Party movement raving about government spending. Do they have a point?
According to the latest Congressional Budget Office report, the US will spend $1.35 trillion more than its revenues this year, slightly less than the $1.4 trillion deficit in 2009. Our accumulated deficits (plus interest), or our National Debt is $12.38 trillion.
US debt is currently 86.7% of our Gross Domestic Production, and is projected to be 94.27% by the end of this year. How does that compare to our historic levels of Debt/ GDP?
A. Post-War Years
Since 1792, our average level ratio of Debt/GDP was 28.32.
Our lowest levels were from 1835 - 1842 (less than 1%), and our highest were 1945 - 1947 (averaging 114.34%), and 1948 - 1950 (averaging just under 92%). Note that the highest years were post World War II, when fears that military spending decreases would cause another Depression subsided, as growth in housing, cold war military spending and industrial production in automobiles, aviation and electronics increased throughout the 1950s.
B. The 1960s and 1970s
In the 1960s, the Kennedy Administration increased government spending and cut taxes, but the level of Debt/GDP dropped from 67.9% in the 1950s to 45.3%.
In the 1970s, a combination of increased inflation and a stagnant economy (coined "stagflation") resulted in high unemployment, and Debt/GDP dropped to 33.7% during that decade.
C. The 1980s
Beginning the decade with a brutal recession, the Reagan Administration responded with tax cuts and spending increases, much like the 1960s. The difference was government spending for social programs was slashed, and military spending increased dramatically. During this decade, Debt/GDP rose to 42.2%.
D. The 1990s and beyond
Economic growth brought deficits down to zero in the 1990s, but a growing debt primarily due Social Security and other social programs increased Debt/GDP to 63.7%. Continued growth in social programs (including the Medicare Drug Program), the Afghanistan and Iraq wars, and the housing bubble (with its ensuing world-wide financial crisis) increased the Debt/ GDP ratio to 64.6% during the decade ended 2009.
II. US Spending by Category
National Defense 19.9%
Human Resources (Including education, training, employment, social and veteran's services) 65.2%
Physical Resources (Including energy, environment, commerce, housing, transportation and community/regional development) 8%
Net interest on National Debt 3.8%
Other Functions (Including international, science, space and technology, agriculture, justice and general government) 5.6%
Undistributed Offsetting Receipts -2.3%
Clearly, the vast majority of US spending are in Human Services (65.2%), and almost half of that spending is Medicare and Social Security. Social Security spending alone is about equal to National Defense.
Spending on Health Care, as mentioned earlier, is 17% of GDP, and is growing at 12% per year. Left unabated it will be half of our GDP in 10 years.
III. The Big Untold Story
China is no longer the largest foreign holder of US debt, having recently reduced their holdings by $34.2 billion. Japan, who now holds more of our debt than any foreign holder, also reduced their holdings by $11.5 billion. Overall, foreign holders of our debt dropped by $53 billion, the largest drop in history.
With our debt increasing, and foreign lenders less willing to buy it, the Treasury Department will now have to attract investors with higher rates of interest.
The 3.8% of our budget we use to pay interest on our debt will increase. While $136 billion may seem a paltry amount in today's vernacular, we derive absolutely no benefit from it, and it is now equal to the amount we spend on education.
With foreign governments finding our debt less attractive, the amount we spend on interest will surely increase to attract other borrowers.
We haven't had the will to fix health care costs that will be 1/2 of our total output in a short 10 years if we do nothing.
We haven't the will to enact financial reforms after the biggest recession since the Great Depression.
Will we find the will to make the sacrifices necessary to cut spending?
Warren Buffett suggested that he will pay higher taxes and forego Social Security payments, regardless of the fact that he's paid into the system all his life. Admittedly, he's a lot weathier than we are.
Nevertheless, maybe he's on to something.
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