The debates about the Federal Budget get to be pretty
confusing. The absolute magnitudes of
money mentioned have little context. For
instance, this year’s budget deficit is $1.089 trillion. It is good to know
that this amounts to 7% of the $15.6 trillion
US GDP. Obama’s revenue proposal will
raise $1.6 trillion over 10 years, I have to remind myself that a $15.6
trillion/year economy would have generated $156 trillion over that period (not
accounting for growth in the economy) and so Obama’s proposal amounts to about
1% of the economy.
Fortunately, the US government issues documents that lay out
the financial situation in some detail.
I will use primarily the following three to try to gain a quantitative
understanding of the issues.
[1] Monthly Budget Review (Nov 2012) issued by the
Congressional Budget Office (look under “Topics” at http://www.cbo.gov)
[2] The 2012 Social Security Report (THE 2012 ANNUAL REPORT OF THE BOARD OF TRUSTEES OF THE FEDERAL OLD-AGE
AND SURVIVORS INSURANCE AND FEDERAL DISABILITY INSURANCE TRUST FUNDS) found via
Google.
[3] The 2012 Medicare Report (2012 ANNUAL REPORT OF
THE
BOARDS OF TRUSTEES OF THE FEDERAL HOSPITAL INSURANCE AND FEDERAL SUPPLEMENTARY
MEDICAL INSURANCE TRUST FUNDS) found via Google
What I want to understand are:
1.
What are the federal revenues, now and projected
into the future?
2.
What are the required federal expenditures, now
and projected into the future? Social
Security and Medicare, the two paid benefit programs are the chief required
federal expenditures.
I think if we understand these, the choices we have will be
clarified.
Federal Revenues:
For 2012, [1] tells us, the major sources of federal
revenues are (I computed the percentages)
|
Major Source
|
Billion $
|
% of revenue
|
% of GDP
|
|
Individual Income Tax
|
1132
|
46.2%
|
7.3%
|
|
Corporate Income Tax
|
242
|
9.9%
|
1.6%
|
|
Social Insurance
|
845
|
34.5%
|
5.5%
|
|
Other
|
229
|
9.4%
|
1.5%
|
|
Total
|
2449
|
100%
|
15.8%
|
It turns out that federal revenues historically have been
about 18% of GDP, as depicted in the chart below from The Heritage
Foundation (I have no idea of whether their future projection is any good.)
Federal revenues as a percentage of GDP hit
a sixty year low in 2009, when it hit 14.9%. In 2010, it was 15.1%, 2011 – 15.4%, 2012 –
15.8%.
(Taxes overall take up somewhat over 30% of GDP when state
and local taxes are included.)
Federal Expenditures:
For 2012, [1] gives us these figures (I computed the percentages)
|
Major Category
|
Billion $
|
% of GDP
|
|
Defense-Military
|
651
|
4.2%
|
|
Social Security Benefits
|
762
|
4.9%
|
|
Medicare
|
469
|
3.0%
|
|
Medicaid
|
251
|
1.6%
|
|
Unemployment Benefits
|
96
|
0.6%
|
|
Other Activities
|
1022
|
6.6%
|
|
Net Interest on the Public Debt
|
258
|
1.7%
|
|
TARP
|
24
|
0.2%
|
|
Payment to GSEs
|
5
|
0.03%
|
|
Total
|
3538
|
22.8%
|
Federal expenditures in 2008 were 20.6% of GDP, 2009 -
25%, 2010 - 24.1%, 2011 – 24.1%, 2012 – 22.8%.
In round numbers, pre-fiscal crisis, revenues were 18% of
GDP, expenditures were 21% of GDP, and the deficit was 3% of GDP. With the crisis revenues fell to 15% of GDP
and expenditures rose to 24-25% of GDP, and there is the huge budget hole of
9-10% of GDP.
The Budget Crisis
To my mind, there are really two problems – one is the short-term problem described above,
where as a fraction of GDP government revenues fell and expenditures rose
sharply compared to their long term averages.
There is a long- term problem
also, in that Social Security Benefits and Medicare expenditures are currently
at 7.9% of GDP and rising. Per [1], comparing 2012 and 2011, Social Security
Benefits rose by 6% and Medicare by 3%.
In 2012, Social Security Benefits grew at their recent rate, but
Medicare grew significantly slower than the 7% average it recorded during the
last 5 years.
Our political system is trying to use the short-term budget
problem (and associated things, like the debt ceiling, the expiring Bush taxes,
the fiscal cliff and the recessionary effects of a sudden drop in Federal
expenditures) as a lever to address the long term budget problem. This is partly because long-term crises
(like climate change) do not move our political system to take action, partly
because ideology and not common sense dictate the range of choices.
Examining the long
term problem
Examining the long term federal budget problem relies on projections of the future,
which is highly uncertain. The Social Security report [2] thus provides three
projections for the future of social security,
Low-Cost, Intermediate, and High-Cost alternatives. The Intermediate cost projection is their
best estimate; the Low-Cost is optimistic and High-Cost is pessimistic in its
assumptions. I shall use the Intermediate cost projection.
By the way, the Social Security [2] and Medicare [3] reports
are long and dense, I do not claim to have read them fully.
Before going into the numbers, lets look at some of the
factors that go into the projections.
They are described in section V of [2], and included historical
conditions and trends, and expected future conditions including “fertility, mortality, immigration,
marriage, divorce, productivity, inflation, average earnings, unemployment,
real interest rate, retirement, disability incidence and termination. Other
factors depend on these basic assumptions.
These other, often interdependent, factors include total population,
life expectancy, labor force participation, gross domestic product and
program-specific factors.”
Wow, can one really predict anything with such a complex set
of factors? Well, Appendix D of the document provides a sensitivity analysis,
of which I quote a paragraph:
During the
25-year period, the very slight increases in the working population resulting
from increases in fertility are more than offset by decreases in the female labor
force and increases in the number of child beneficiaries. Therefore, program
cost increases slightly with higher fertility. For the 75-year long-range
period, however, changes in fertility have a relatively greater effect on the
labor force than on the beneficiary population. As a result, an increase in
fertility significantly reduces the cost rate. Each increase of 0.1 in the
ultimate total fertility rate increases the long-range actuarial balance by
about 0.13 percent of taxable payroll.
So, at least we get a sense of how much the misprediction of
each factor will affect the conclusions.
An issue I’m eliding over that concerns the trustees of
Social Security and Medicare, is how their expenditures compare to the specific
social security and medicare taxes. My
thought is that the federal budget can be rearranged as long it remains within
control and does not occupy an ever-growing percentage of GDP.
With that, we go to Table VI.F4 in [2] “OASDI and HI Annual
and Summarized Income, Cost and Balance as a Percentage of GDP, Calendar Years
2012-90” and extract the following numbers from the Intermediate cost
projection.
(HI is Medicare Hospital Insurance – Medicare Part A. OASDI is social security, the table extract
below is OASDI only)
|
Calendar Year
|
GDP in billions $
|
SS as % of GDP
|
|
2012
|
15.757
|
5.01
|
|
2013
|
16.441
|
5.06
|
|
2014
|
17,300
|
5.09
|
|
2015
|
18,303
|
5.10
|
|
2016
|
19,340
|
5.11
|
|
2017
|
20,392
|
5.14
|
|
2018
|
21,458
|
5.19
|
|
2019
|
22,488
|
5.28
|
|
2020
|
23,525
|
5.38
|
|
2021
|
24,597
|
5.49
|
|
|
|
|
|
2025
|
29,392
|
5.89
|
|
2030
|
36,679
|
6.25
|
|
2035
|
45,940
|
6.36
|
|
2040
|
57,653
|
6.31
|
|
2045
|
72,302
|
6.21
|
|
2050
|
90,396
|
6.12
|
|
2055
|
112,810
|
6.08
|
|
2060
|
140,739
|
6.06
|
|
2065
|
175,704
|
6.04
|
|
2070
|
219,280
|
6.04
|
|
2075
|
273,504
|
6.04
|
|
2080
|
340,865
|
6.06
|
|
2085
|
424,327
|
6.09
|
|
2090
|
527,996
|
6.13
|
In this projection, the worst burden that social security
presents is around 6.36% of GDP in 2035, I suppose the demographic bulge of the
Baby Boomers fade away after that.
Anyway, these projections cannot by their nature include technological
changes and catastrophes, both natural and man-made that will visit us during
this long span of years. Also, my mind
boggles at a US GDP of $528 trillion in 2090!
From the Medicare report [3], I simply quote:
As
can be seen in figure I.1, Medicare’s costs under the Trustees’ current-law
assumptions rise from their current level of 3.7 percent of GDP to 6.0 percent
in 2040 and 6.7 percent in 2085. If the SGR restraint were overridden, as
described above, Medicare costs would rise to 6.5 percent of GDP in 2040 and
7.8 percent in 2085. Under the full scenario, in which adherence to the ACA
cost-saving measures also erodes, costs would rise to 7.0 percent of GDP in
2040 and 10.3 percent in 2085.
Notes:
SGR
= Sustainable Growth Rate formula for physician fee schedule payment levels
ACA
= Affordable Care Act (Obamacare)
So
the long-term budget problem is that Social Security and Medicare will grow to
12-13% of GDP from the current level of 8-9% (provided Obamacare and SGR hold,
otherwise the situation becomes much worse.
Solving the long-term problem
The previous Congress refused to raise the debt ceiling
until the conditions that led to our current “fiscal cliff” were set. Now all the expenditures were authorized by
that or previous Congresses – so it shows the peril of trying to bind future
Congresses by current agreements. In any
case the future is uncertain. So what we
should do is make sure that the trajectory is in the right direction.
If we want to hold defence military spending at 4% of GDP ,
and discretionary spending at its current level of 6-7% of GDP, and Social Security and Medicare
grow to 12-13% of GDP, that means that federal expenditures must be permanently
at around 23-24% of GDP. To have no
problem of growing debt, that means federal revenues need to be raised from
their current historical level of 18% to a new long term average of 23-24% of
GDP. This seems to be politically
unacceptable right now (in the future, who knows?). So we have to bend the social insurance curves.
Of the two major programs, Social Security presents the
smaller problem (about 1.4% increased share of GDP) and Medicare the larger one
(3% or more increased share of GDP). I also think Social Security is more
definite and predictable, e.g., does anyone have any idea of when customized
medical treatment informed by genetic profiles or stem cell therapies will kick
in and whether they will improve or worse the cost situation?).
On Social Security, therefore, I support some long term fix,
improving its revenues by increasing the base of collection, and some cuts.
