United States Treasury Building in Washington D.C.
The inability of the political system in the United States to enact needed reforms in entitlements, is an indication how dire the issue of governmental debt, has become for Americans.
The present trajectory in the cost of popular social programs is simply unsustainable, yet political gridlock has become the mainstay of the national government.
It is a clear signal that American economic and financial supremacy, is nearing the end, after nearly three quarters of a century.
The latest example, was the failure of the legislature to successfully deal with the newest failing entitlement, known as Obamacare. Although one can legitimately argue the merits of offering a government sanctioned insurance program for healthcare, the present system is imploding.
The Affordable Care Act (Obamacare) was designed to fail, because the whole program was based on wrong headed assumptions and a total denial on long term sustainability.
President Obama signing the Patient Protection and Affordable Care Act on March 23, 2010.
When Democrats controlled both houses of the Congress and the Presidency from 2009 to 2010, they successfully forced through this mandated medical insurance program, without a single vote from the opposing party.
Now in 2017, with Republicans in control of Congress and the Presidency, an attempt is being made in reverse, to repeal the entire legislation, or at least the most intrusive parts of it. Again, it is being done without the input from the opposing party.
Democrats refuse to acknowledge, that the crowing achievement of President Obama has utterly failed, to deal with the problem of the lack of affordable health insurance for millions of Americans.
The goal of three generations of some leftist political leaders, in providing government directed healthcare, is rapidly unwinding.
U.S. health insurance coverage by source in 2016. CBO estimated ACA/Obamacare was responsible for 23 million persons covered via exchanges and Medicaid expansion.
The answer from their party leadership, is to double down and provide an ever rising government provided subsidy, to both individual Americans and to medical insurance companies.
In their minds it is the first step, in moving towards a universal single payer system.
The Republicans pushing for total repeal for their part, continue in the false premise that the paradigm has not changed in seven years.
In 2009 and 2010, the national argument was over if the federal government should become more involved in both healthcare and medical insurance.
These politicians basically want to turn the clock back, as if the two terms of President Obama never happened.
Unfortunately, for these political leaders, there has been a shift in public opinion on the issue. The argument is now based on the extent of government involvement. Hence, the often heard political slogan of repeal and replace.
Congressional Democrats celebrating the 6th anniversary of the Affordable Care Act in March 2016 on the steps of the U.S. Capitol.
There is a premise that some national leaders refuse to recognize, but is quite simple. Once an entitlement is provided to a segment of the electorate, it is next to impossible to withdraw this subsidy, regardless of the cost.
This is where the long term problem lies. The Democrat Party wanted to bring about a new entitlement, without actually finding a realistic and sustainable way to pay for it.
Some suspect they knew it would fail from the beginning and it was a simple ruse, to usher in the single payer system, that widely exists throughout Europe and Canada.
A symptom of what went wrong in the medical insurance reform as provided by the Democrat Party, is the vast expansion of Medicaid. Millions of more Americans are now provided health insurance through government payments, as healthcare costs continue to rise at extraordinary rates.
The fear of losing the additional federal funding for Medicaid at the individual state level, is why a number of Republican Senators failed to back a repeal of Obamacare.
John McCain U.S. Republican Senator from Arizona. One of three GOP Senators who voted against partial repeal of Obama Care.
These Senators along with the opposition disingenuously point out, that a repeal of Obamacare will deny millions of Americans health insurance. They use the Congressional Budget Office (CBO) figures to underline their position.
It is true that millions of more Americans will no longer have health insurance, if the Affordable Care Act is repealed. However, this will largely be the result of many people deciding to no longer purchase insurance, once the mandate to do so is removed.
The reduced qualifications to apply and receive Medicaid, the government sponsored program to provide healthcare to lower income Americans, is a separate issue.
A decision was made by the Obama Administration to lower the income barrier, in order to allow more Americans to sign up for Medicaid. These individuals no doubt, will want to keep this new entitlement.
Lost in the national argument about healthcare and the level of government provided medical insurance, is the reality, that Obamacare is yet another largely unfunded government program.
The unfortunate truth is the entire entitlement structure, as designed by the United States government in the second half of the 20th century, is unsustainable under the present system.
Donald Trump
45th U.S. President, insists Obama Care is broken beyond repair.
The recent election of populist Donald Trump, will not help solve this issue either. He has largely taken the issue of entitlement reform off the table, with the exception of supporting the repeal and replacement of Obamacare.
The majority of government provided entitlements are pay as you go programs. This is why they have a finite period of solvency.
When Medicare and Social Security were first designed and implemented, they were seen as a way to help older Americans stay of poverty. At that time there were 16 working age adults, paying into a program for every person receiving these benefits.
The aforementioned ratio, has steadily declined over the years. It is now 2.8 to 1 and is expected to drop even further. In addition, as Americans are retiring in ever greater numbers, the average life expectancy has been rising as well, over the last few decades.
Social Security has also grown and now purportedly contains the government’s financial reserves for not only seniors, but survivors of participants in the program and those who become disabled. The last time the government proposed and was able to pass a reform was in 1983.
Another issue that has now become evident, as the trust fund for Social Security begins to pay out more in benefits than it receives through taxation, is how the previous years of surplus were squandered.
The government spent this extra money on other political expedient programs, to avoid borrowing more money or raising taxes.
Government officials provided the Trust Fund with promissory notes of government debt. Unlike private retirement programs, the money was not invested in tangible assets. The only way to redeem these government bonds, is to take them from general fund revenue.
One part of Social Security headquarters in Woodlawn, Maryland.
The so called day of reckoning when these trust funds finally go broke, has in reality already arrived.
Although the trust fund is supposed to have $2.8 trillion USD (United States Dollar) in reserves, this is based on the combined income from payroll taxes and interest being paid on the loans, took out by the government in previous years.
Beginning in 2019, Social Security will be in a permanent deficit situation.
The managers of the fund will have no choice, but to start redeeming the government bonds. So the almost now fictional account, will run out of these bonds by 2034.
After 2034, there will have to be at least a 25% cut in benefit allocation or an increase in taxes. The only other option is a combination of both or a rise in the age, before one becomes eligible for any payout.
Sectoral financial balances in U.S. economy 1990–2012. By definition, the three balances must net to zero. Since 2009, the U.S. capital surplus and private-sector surplus have driven a government budget deficit.
There are other things that can be done to forestall the inevitable. This would include cutting benefits for high income or wealthy retirees, grow the benefits paid out more slowly in a lower cost of living index, and possibly raising or eliminating the present cap on Social Security taxable wages.
According to present law, an individual only pays this tax on earned income up to $118,500.00 USD.
In the meantime, an ever greater share of the benefits, will be paid for out of general revenue funds.
If the federal government had a surplus or at least a balanced budget, this would seem reasonable. Of course, the opposite is the case. The federal government will need to reimburse the fund, a total of $11.4 trillion USD at present, to keep it solvent over the next couple of decades.
The situation is even worse for Medicare. The trust fund that pays Medicare’s hospital expenses, will run out of money already in 2029.
A sample Medicare card.
There are separate lines for basic Part A and Part B’s supplementary medical coverage, each with its own date.There are no lines for Part C or D, for which additional supplemental policies are issued with a separate card.
Together Social Security and Medicare, comprise 42% of federal program spending as of 2016. Medicare covered 56.8 million beneficiaries last year and Social Security payments were paid out to 60.9 million individuals.
As stated previously, these enormous expenditures would remain manageable, if the United States government was more responsible in its overall spending. Instead, the last decade has witnessed the most irresponsible accumulation of debt in American history.
Although many American politicians continue to let the electorate believe, that the present budget deficits are the result of the financial crisis and the ensuing Great Recession (2007-2009),this reasoning provides in reality, only part of the explanation.
Despite the third longest economic expansion since the end of the World War II, deficit spending has continued apace, during the years of recovery.
The ending of the recession in 2009 under the first year of the Obama Presidency, did little to stop the runaway government spending.
Medicare and Medicaid Spending as % GDP (2013)
The $1.547 trillion USD in 2010, the $1.3 trillion in 2011 and the $1.087 trillion in 2012 deficits, were collectively totally irresponsible, given the increasingly precarious financial position of the United States.
By the end of the Obama Presidency, the deficits that he was largely responsible for during his two terms in office,were anywhere between a total of $7 to over $9 trillion USD.
The variation is based on how one calculates responsibility, for incoming and outgoing administration budgetary years.
The spending under President Obama may have equaled an increase of anywhere between 57% to 87% and was a far larger amount, than was wracked up by his predecessor Bush, at between $3.3 to $5.849 trillion USD.
President Bush himself, was also responsible for an increase of at least 50% in deficit spending from the Clinton years.
After an initial surge in defense spending following the terrorist 2001 attacks and the resulting War on Terror, the second term of the Bush presidency, saw steadily declining deficits.
By the end of 2007, the year before the financial crisis and the Great Recession, the deficit had dropped to a low of $161 billion USD.
World map showing real GDP growth rates for 2009 (countries in brown were in recession.)
The massive expansion of government debt, despite the imposition of the sequester which were automatic spending cuts in 2013, have become the responsibility of both parties.
The cuts enacted by the sequester, were evenly divided in dollar amounts between defense and non-defense categories.
The cuts in defense offered by the Republicans, were the only way the Democrats would agree to reductions on the discretionary side. Of course, Social Security and Medicaid for example, would be exempt.
The Democrats had gained control of both houses on Congress in 2007 and the executive branch in 2009. After the roll out of Obamacare in 2010, the Republicans would regain control of the House Of Representatives in 2011 and the Senate in 2015.
Risks due to increasing entitlement spending, according to GAO’s projections of future trends.
The budgetary sequester seems to have been abandoned as of 2017. Republicans have regained control of the presidency, while retaining control of both houses of Congress.
The reductions would of equaled over $1 trillion USD, if they had been kept in place until 2021.
The accumulation of all these yearly federal deficits, have resulted in a rapid rise in the national debt. The total is now almost $20 trillion USD. That equals $166,000 per American taxpayer.
The balance had gone from $10.6 trillion at the beginning of the Obama Presidency to $19.9 trillion at the end of it.
Obama was close to creating more government debt during his administration, than all of the former Presidents combined, from George Washington through George W. Bush.
Of course the above statistics are not in constant dollars, but they neither consider the future burden on debt, for a new entitlement on government finances either.
Interest to GDP, a measure of debt burden, was very low in 2015 but is projected to rise with both interest rates and debt levels over the 2016–2026 period.
This extraordinary amount of $20 trillion of course, corresponds to a surge in interest payments, on the accumulated debt, which now tops $264 billion USD.
It is due to rise sharply, in the years ahead. More than $2.5 trillion USD has already been spent on this endeavor, over the preceding years.
When one imagines what else this money could have been invested in, it clearly demonstrates the shortsighted behavior of the political elite.
A more worrying sign is the debt to GDP (Gross Domestic Product) ratio. It has gone from 67.7% of the total economy in 2008, the last year under Bush, to 106.1% at the end of 2016. The GDP of the United States was estimated to be $18.57 trillion in 2016.
Analysts and investors begin to concern themselves with national debt, once it has grown beyond 100% of GDP. This is because if it grows much beyond that amount, it leads to financial instability for a country and there is an ever increasingly likelihood, of some sort of default.
CBO: Public Debt Under “Extended” and “Alternate” Scenarios.
The lack of faster domestic economic growth, is another concern for financial experts. Despite experiencing the third longest business expansion at 95 months in American history (back to 1854), growth has been sluggish.
Since 2009, growth never reached 3% for any year. This has been the slowest economic recovery ever. Without a faster growing economy, the ability to fund the massive entitlements becomes far more challenging.
Unfunded federal entitlements in whole, are now estimated to be in excess of $120 trillion USD.
Despite record low interest rates enacted by the Federal Reserve, the economy has not rebounded as expected. The United States central bank had started rates on a downward trend in 2006, and only really reversed course beginning at the end of 2016.
Although there has been two recent interest rate increases, the benchmark remains low by historic standards at just 1.25%, from the low of 0.5% last year. The lowest point was 0.25% enacted in 2008. Since 1971, the average has been 5.78%.
Janet Yellen, chair of the Board of Governors of the Federal Reserve System, the American equivalent of a central bank.
There are some strategists that insist the Federal Reserve is only now increasing rates, so the bank will have the capacity to lower them again, when the next recession arrives. Still, the rise has been slow, to avoid derailing the slow growing economy.
In order to encourage growth, the Federal Reserve had embarked on a huge program of stimulus in December of 2008, known as quantitative easing. The ongoing monthly purchase of mortgage backed securities and Treasury bonds, was finally ended in October of 2014 . However it has left the central bank with an enormous balance of $4.5 trillion USD.
President Trump would like to launch another stimulus similar in size, to the one passed by former President Obama in 2009. The original $787 billion allocated, was later revised to $831 billion, through 2019. It has remained highly controversial, since a sizable portion was not used for tax cuts and infrastructure spending, as promised.
There is no doubt an infrastructure bill that would focus exclusively on that sole purpose, would provide jobs and help the country repair and build needed communications and transportation projects.
U.S. deficit and debt increases 2001–2016
The problem remains where will the money come from? For the first time, an American president no longer has the luxury, to simply ignore the coming financial and economic tsunami, often associated with massive debt.
It is going to be increasingly difficult to fund vital government programs in future years. The political gridlock in the nation’s capital is tightening, as neither side is willing to compromise.
When the Republican leaders suggest a slowing in entitlement growth expenditures and discretionary spending, Democrat leadership refers to these proposals as draconian cuts.
The only real reductions Democrats would be willing to make, are mostly in defense. There is no doubt that efficiencies can be identified and money be saved in this portion of the budget, but there is simply not enough, to significantly reduce overall government spending.
The budget deficit for 2017 is estimated to be $443 billion USD. The 2018 level, is predicted to be close to $392 billion USD (only in the absence of a recession). These lower amounts will be temporary, as mandatory spending will soon force government spending and deficits ever higher.
The inability to slow the growth in federal spending, is undermining the American dollar and slowly eating away at the financial system of the United States. The next recession will be particularly painful, as the normal tools used to deal with economic downturns, can no longer be employed to their full effect.
Real future growth will be progressively more difficult, as the burden of staggering debt, will weight heavily on the entire American economy.