May 2, 2012
As originally publish in the New Hampshire Union Leader
Elections and governments produce many tall tales. One of the tallest was the wishful thinking that the federal and state governments are in fine shape fiscally. Each month, something else emerges that tells us how bad things really are. This month’s dead canary in the fiscal coal mine is the sooner-than-expected exhaustion of the fictional social security and Medicare trust funds. Like the federal government, New Hampshire has hidden problems. Unlike the federal government, ours are getting better.
The Social Security Trustees release regular reports projecting the long term insolvency of the programs. What we call social security consists of the larger “Old Age and Survivors Insurance (OASI)” – the pension program we traditionally think of as social security – and a smaller “Disability Insurance (DI)” program which will be bankrupt much sooner.
For decades, the amount of tax taken from your paycheck was greater than the amount needed to pay that year’s bills so Congress took the money and gave the trust fund an IOU. But those fictional assets consisting only of a government IOU continue to grow. However, they grow slower as benefits paid rise faster than taxes taken. And in a few years, assets will start decreasing. So the trustees make long range projections to warn us about the future.
Twenty years ago, we were told that the theoretical assets would be exhausted in 2057, long after everyone reading the report would be dead so nobody cared. Ten years ago, the bankruptcy date was moved to 2038, a year many of us hope to reach. And this year we have been told that the money runs out in 2033 – the year I might have started collecting.
Actually, considered separately, the disability plan runs out in 2016, before the next presidential election. The old age and survivors pension portion might struggle on until 2035.
By the way, the Medicare trust fund is equally fictitious in the sense that it too exists as a bookkeeping tool so the government knows what it didn’t actually set aside. That theoretical trust fund will be spent in 2024. As Bill Clinton noted, the theoretical trust fund “does not have any impact on the government’s ability to pay benefits.” They have to be paid, like everything else, with this year’s revenues.
For decades, politicians of both parties have borrowed the trust fund money and trillions more (actually a trillion a year these days) to finance their spending wishes on the backs of those yet to be born. This strategy – called pretending the future doesn’t exist – is good politics and worked well for Greece and Portugal, at least until it exploded and ruined those two countries.
Despite all the warning signs in Europe and a subtle alarm from trustees, politicians in the swamps of Washington continue to pretend nothing need happen. Paul Ryan’s an alarmist. All is well.
Back at home, we have similar problems but we’re doing something about them. Some politicians have been critical of my description of fiscal crisis and claimed that we didn’t need to cut the budget 10% because previous budgets were nominally balanced.
But over the two budgets previous to the cut, we increased spending without the revenues to pay for them. New funds were created to obscure general fund spending and spending paid for with borrowed money doesn’t count under our accounting rules but, comparing apples to apples, general fund revenue rose over two budgets by 14.5% in regular tax funds and 20% in total funds despite an actual decline in tax revenue.
How was that possible? A federal bailout of one-time used to pay for ongoing expenses was one way but borrowing was another. Unique borrowing methods shifted money off the regular books to make comparisons difficult. We even borrowed money to pay for our borrowing costs.
Look at state debt. From 2007 to 2011, state debt rose 43.5%. The previous two four years cycles, it rose by 8% and 4%. Put another way, the annual increase from 1999-2007 was 1.4%. From 2007-2011 it was 9.5%. So we borrowed to balance. Nice work in Washington, unusual in New Hampshire.
In the current spending declined because we don’t have the money. Debt is going to decline as well. Although be careful. There are some politicians today who want to borrow more while the interest rates are low. That makes sense if it replaces borrowing in later years but I fear they want to borrow in addition to not instead of.
New Hampshire learned the lesson of Greece and Portugal. Washington still hasn’t.