How Long Can We Sustain Our Unsustainable Fiscal Policy?

Bill Bergman Director of Research, Truth in Accounting
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The U.S. Government reported $21.5 trillion in debt on its latest financial statements. This massive amount included about $13 trillion in debt “held by the public,” almost $7 trillion in employee retirement benefit obligations, and other types of debt.

Debt the federal government does NOT include on its balance sheet the obligations undertaken in Social Security and Medicare. The value of these obligations is larger than all the reported debt put together, even on net counting their expected payroll taxes. These massive amounts, while not on the balance sheet, are included in “Statements of Social Insurance” elsewhere in the financial report.

Social Security and Medicare have long been funded on a pay-as-you-go basis. “Contributions” are withheld from payroll checks, just like federal income taxes, and sent to the government. The government then spends that money — either directly in benefits, or indirectly, after the balance of the withholdings are “invested” in special Treasury securities.

This “worked” for decades, with a tailwind from a favorable ratio of workers (paying taxes) to retirees (receiving benefits). Those days are soon coming to an end. 

It isn’t like the end hasn’t been foreseen, either. The implications of the aging of the “baby boom” generation and longer lifespans have long been understood.

The above-noted Financial Report of the U.S. Government has been issued annually since 1998. Even back then, while discussing the government’s fiscal path, the report addressed the question of long-run “sustainability” of fiscal policy – particularly in social insurance programs. 

A closer look at this report since 1998 reveals some interesting, if not alarming, trends.

The discussion of “sustainability” issues began getting significantly longer in the annual report for fiscal 2006, released in early 2007. Later that year, the Government Accountability Office (GAO) issued “The Nation’s Long-term Fiscal Outlook,” which introduced a discussion of the nation’s “fiscal gap.” This is basically a measure of the combination of spending cuts and/or tax increases needed to keep the nation’s debt/GDP ratio from rising massively in the future, given current law and policy. The GAO discussion concluded:

“This gap is too large for us to grow our way out of the problem. It would require decades of double-digit real economic growth, but the United States has not had a single year of double-digit real economic growth since World War II.”

Three years later, in 2010, the government’s annual financial report began to include its own discussion of the fiscal gap.  Unfortunately, the government’s true debt has continued to rise rapidly since then. And massive, unsustainable debt increases remain the projection, under current law and policy, including policy for social insurance programs.  

The question of sustainability hasn’t gone away. If anything, the people who write the annual financial report have spilled more ink on it. The number of times the words “sustainable,” “sustainability” or “unsustainable” appear in the report has risen at an accelerating pace in the last decade – particularly in 2015.

How long can this go on?

In academia, there is a marriage of sorts between economics and political science, in a field called “public choice.” This perspective delivers some pretty solid predictions about government behavior, including how special interest group forces threaten to dominate policy at general expense. And how politicians can deliver short-term favors at the expense of future generations, via debt financing in lieu of taxes.

With misleading accounting greasing the wheels.

How long can we sustain the unsustainable? Not much longer, is my prediction. Especially if the tailwind from declining interest rates comes to an end.