Will Raising Payroll Taxes Save Social Security?

The dire findings of the 2015 report of the Trustees of the Social Security Administration has stirred public debate about whether a hike in the payroll tax rate can save Social Security. The Trustees' report once again alerts Congress to the looming insolvency of Social Security, now estimated by 2034, and of the Disability Insurance program, projected to become insolvent next year. The most expedient solution, if not the most practical, is to simply raise the payroll tax rate. Indeed, many have advocated just this. 

Proponents of a tax hike claim that by raising the rate by 2.3%, we could insure the solvency of Social Security for another 75 years. But part of understanding the status of Social Security is recognizing the many assumptions and forecasts that are embodied in the Trustees' report. For instance, the Trustees' report projects that OASDI costs will rise to just 6.2% of GDP by 2089. Really, 2089? The Federal Reserve can't even predict GDP next quarter and the Trustees are projecting what GDP will look like 74 years from now? Let's get a grip, people.

When Social Security was originally imposed, payroll taxes were just 2% of the first $3,000 of wages and salary, or a maximum of just $60 per year (roughly $1,050 in current dollars). By 1960, however, the tax rate had already tripled, on its way to today's current level of 12.5% (with these amounts equally split between employer an employee). That puts the maximum worker contribution in 2015 at just under $7,500 (with an equal contribution by employers) or seven times greater than what the maximum worker contribution was when Social Security was first enacted (adjusted for inflation). In fact, payroll taxes have grown so dramatically it's now estimated that 82% of American households pay more in FICA payroll taxes than they do in federal income taxes. Yet despite this growth in payroll taxes, the 2015 Trustees report estimates that the OASDI, the Trust Fund for Social Security and Disability Insurance is underfunded on a present value basis, by $10.7 trillion. 

In planning to raise the tax rate, we must also consider that in 2010, President Obama championed the idea of temporarily cutting the payroll tax rate, as a measure of economic stimulus for a then struggling US economy. Indeed we did, and the IRS gleefully provided the following statement to taxpayers:

"Millions of workers will see their take-home pay rise during 2011 because the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 provides a two percentage point payroll tax cut for employees, reducing their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid. This reduced Social Security withholding will have no effect on the employee’s future Social Security benefits." - IRS release, IR-2010-124, Dec. 17, 2010.

The New York Times ran a story that proclaimed,

"The biggest Christmas present that many people will get this year comes form the Federal Government, thanks to the tax bill that President Obama signed a week ago" - New York Times, December 24, 2010.

In 2011, pushing back on Republican opposition in Congress to extending the tax cut into 2012, President Obama challenged members of the GOP to "fight as hard for working class families as you do for those who are more fortunate". Who could resist?

So if a cut in the payroll tax rate provides economic stimulus by putting more dollars in Americans' pockets, particularly the pockets of working class families, wouldn't a tax hike do precisely the opposite, take money from workers paychecks and provide drag on the economy? Well, of course, it would. Americans like quick fixes, but I'm afraid solving Social Security will require a more elaborate plan than simply raising the tax rate.

Why for Many this Might Still Feel Like a Recession

The final read of second quarter GDP was just released, showing an annualized rate of growth of 3.9%. This follows a revised Q1 post of 0.6%. All in, the US economy in the first half appears to have expanded at something like a 2.25% rate of growth. But the GDP report that we read online or in the newspapers will actually tell us very little about how we're doing personally or why for so many people this might still feel like a recession.

The official measure of GDP is compiled quarterly by the Bureau of Economic Research of the Commerce Department of the US government. It's intended to measure the production of all goods and services in the economy. The measure is then adjusted for inflation, compared to the prior quarter, and annualized. The result is what is referred to as the "real" rate of growth in the economy during the quarter, or simply GDP.

But the Commerce Department has no way of actually tracking inflation adjusted sales. If your bill at the grocery store is $200, the grocer doesn't report those sales to the government adjusted for inflation. Rather, sales data for your grocer and throughout the economy are reported on a nominal (or real dollar) basis as they occur. 

So how does Commerce get to the "real" inflation adjusted rate of GDP that we all read? Very simply, they start with total sales from all sectors, consumer, business, government, investment and adjust for the net value of exports (i.e., exports-imports). This total, or nominal GDP, is then reduced by Commerce's estimate of inflation. Different than the CPI that most of us are familiar with, Commerce uses a GDP price inflator, as its preferred measure of inflation. If inflation (or the GDP deflator) in a quarter were zero, for instance, then nominal and real GDP would be the exact same number. But it seldom is. So inflation is subtracted from the current dollar number to arrive at reported GDP.

Now, this being the case, we must also bear in mind that it's in the government's interest to report as high a quarterly GDP as possible. After all, politicians can point to (real) GDP as a measure of growth and the vitality of the economy. Negative GDP changes indicate recessions. Severe GDP declines, depressions. This is not to say that Commerce is cheating or cooking the books, but here's the point. GDP growth as we are all accustomed to seeing it, is a calculated number. It depends heavily on what GDP delator is subtracted from nominal GDP in order to produce the real GDP that we all read about. Again, not to suggest foul play, but by understating inflation, the government could (were they so inclined) artificially overstate the headline rate of growth in the economy. 

More to the point of this article, though, is understanding that whatever rate of inflation the government calculates, the number is only meaningful to us to the extent that the rate of inflation of the things that each of us actually buys, precisely reflects the "basket" of items used to comprise the GDP deflator. Now here's where this gets interesting.

Let's take 2015 Q1 numbers as a point of reference. For Q1, the rate of GDP (after revisions) was revised to show an increase of  0.6%.  In the Commerce report, they indicate that the growth of nominal production of goods and services, was 0.8%, indicating that the GDP price deflator (or the government's official measure of inflation) for the first quarter was 0.2%, or close to zero. None of you felt any inflation in the first quarter, did you?

And that's the point. The GDP deflator reflects changes in prices for a government calculated, theoretical basket of goods and services. Because it is a collection of items, however, each individual item will have its own rate of price inflation. Some prices may be rising, some falling but when you roll it all together and assign weightings, Commerce can compute an average price change, or GDP deflator.

Here's why this is so important.  Let's say that in Q1, when the GDP deflator was 0.2%, food costs rose by 3% and rents rose by 5%.  But these gains were offset by falling prices in electronics, computers and washing machines. The result was 0.2% overall, or virtually no change in inflation for the quarter. But let's also assume that you, personally, didn't buy a new washing machine or computer, but you did buy groceries and pay rent. Then for you, personally, the rate of inflation was (on an annualized basis) something closer to 4%. When this rate is subtracted from nominal GDP of 0.8%, then GDP to you felt like -3.2% - a deep recession.

This illustration points to the problem with the GDP statistic. As with much economic data, it is often reported on the basis of broad aggregates in the economy, in this case a broad measure of assumed inflation. By using aggregates to arrive at economic data for the economy as a whole, we may be losing sight of what the average consumer may actually be experiencing.

A Generation Empowered

A Generation Empowered's Analysis of the 2015 Social Security Administration's Annual Report and what it means to the Millennial Generation.

2015 Trustees Report on the Social Security Trust Fund

Each year the Trustees of the Social Security and Medicare Trust Fund release a report on the status of the funds. No sooner was this year's report released than did the Huffington Post publish an article with the title "2015 Trustees Report of Social Security Confirms that Expanding Social Security is Fully Affordable". You can read the full article here. The article attempts to dispute concerns that the Social Security Trust Fund is on a path to insolvency to put forth a broader argument for expanding Social Security benefits. 

An expansion of benefits is, in fact, needed to provide for a reasonable and adequate standard of living for a generation of retirees, expected to grow to 70 million over the next fifteen years. However, it's imperative that we also have a clear understanding of just where Social Security now stands, where it's headed and what its sustainability may be for future generations. Moreover, as the article and Trustee report both point out, the urgent and imminent demise of the Disability Insurance portion of the Trust Fund (i.e., 2016) is a cause for great concern. How to address DI's insolvency, however, is the subject of much controversy.

Despite the thrust of the Huffington Post article, the actual 2015 Summary of the Social Security Trustee's Report clearly states, "Beyond Disability, Social Security as a whole as well as Medicare cannot sustain projected long-run program costs under currently scheduled financing". This statement, in one of the opening paragraphs of the Trustee report should make it quite clear that there is a very serious problem with the future solvency of the Social Security program. The report goes on to state that, "After 2019, Treasury will redeem trust fund asset reserve until depletion of the total trust fund reserves in 2034". Hard to see how this statement could be misinterpreted, but let's take a closer look at the numbers.

As the Huffington piece correctly points out, while in 2014 the outflows of Social Security benefits and costs exceeded the inflows from payroll and other taxes, the fund balance still grew through the addition of interest income to the fund (an amount that exceeded this net program outflow). Now, you may be curious about the source of this interest income, which is really the subject of a much longer discussion. But basically, the story begins with Congress borrowing annual surpluses from the Social Security Trust Fund, for many years now. 

Social Security Trust Fund surpluses (amassed due to favorable demographics in prior years) have been routinely diverted by Congress to support a broad range of (non-retirement related) budgetary imbalances. In place of the cash extracted, the Treasury has substituted a special class of US Treasury bonds. So much swapping of Treasury bonds has taken place, in fact, that the Social Security Trust Fund is now the world's largest holder of US Treasury bonds, surpassing both China and Japan. This means that in order for the Social Security Trust Fund to meet its 2034 date of insolvency (and continue to pay partial benefits of 75% of scheduled) the US Treasury has to either pay off these bonds through taxes, or find third party sources of capital to refinance the bonds as they come due. Oh, the amount? It's $2.8 trillion, with a "t".

Diverting funds from Social Security now to shore up Disability, as has been proposed, would resolve the immediate crisis of the Disability Insurance portion of the Trust Fund, but it would further compromise the solvency of Social Security. It's borrowing from Peter to pay Paul, something our Congress manages to do with great skill, but something that also simply trades one problem for another. As the Trustees of the Social Security Trust Fund state unequivocally in their report "legislation is needed to address all of Social Security's imbalances...[and]...lawmakers need to act soon to avoid automatic reductions in payments to DI beneficiaries in late 2016".

So let's avoid the attempt to mischaracterize the status of Social Security, or to needlessly politicize the discussion along party lines. It's math. And something needs to be done to fix it now. You can read more about what can be done in the blog post below, What's Wrong with Bernie Sanders' Plan on Social Security and How to Fix it, or in my new book Up in Smoke: How the Retirement Crisis Shattered the American Dream.

Puerto Rico, Bankruptcy and a New American Conscience

Greece has stolen the headlines lately, as the European Union and the IMF try to find a solution to the country's mountain of debt and depression like economy. Unfolding on a smaller stage, though, is the looming bond default by the island of Puerto Rico.  A default, restructuring, or "re-profiling" of the Commonwealth's debt holds the potential for significant losses for the holders of the island's $72 billion of US tax-exempt bonds.  And no sooner did the island's Governor, Alejandro García Padilla, publicly declare the debt to be "unpayable" last week , than did the island government fail to make payment on $93.7 million of bonds of its Public Finance Corporation.

Lawmakers in Washington, finally coming to grips with the realization that the Puerto Rico debt crisis is real, hurried a bill into Congress designed to amend the federal Bankruptcy Act, offering a special exception for the island. Puerto Rico, like the many states in the US that are imperiled by looming pension obligations and stagnant revenues, is not authorized to file bankruptcy under current law. Chapter 9 of the Bankruptcy Act limits filing to US cities, counties and special districts. Chapter 9 was the body of law under which the cities of Detroit, Stockton, Vallejo, Central Falls, Harrisburg and San Bernardino recently took refuge, as they attempted to squeeze their way out of contracted and publicly approved municipal debt.

Unlike those cities, however, where the outstanding bonds were largely held by municipal bond insurance companies, banks and large institutions, the massive debt of Puerto Rico is widely held, often directly by individuals. It is also held in varying degrees by an estimated 377 national municipal bond funds of which the public may be invested. When the bonds in question in prior bankruptcies were guaranteed by bond insurers or banks, it was surprisingly easy for public opinion (as well as that of the courts) to be complacent with default. After all, if there were losses, they deserved it. The bondholders were (mistakenly) considered part of the same Wall Street machine that many (also mistakenly) believe caused the Great Recession.

But the challenges with Puerto Rico bonds are far different, at least from a basis of public perception. Different that is, if you or someone in your family is invested in one of those 377 bond funds. An estimated $11 billion of the total Puerto Rico debt is held by these funds. An additional $45 billion is held by individuals directly, mostly Puerto Rico and US mainland residents. Perhaps unaware or unmoved by this subtlety, Chuckie Schumer, the venerable New York Senator, was quick to champion the cause of Puerto Rico bankruptcy, introducing the aforementioned legislation into Congress last week. True to his base, Schumer was likely more focused on the fact that New York is the largest home to people of Puerto Rico descent, outside the island itself. Presidential candidates, Hillary Clinton and Bernie Sanders were also quick to jump on board, not missing the relevance of New York and Florida voters (the next most populated Puerto Rican state) to their political campaigns.

But this is politics. We try not to set the bar too high. More disturbing, though, is popular opinion. If you read the news media and follow the comments on blog posts, it appears most Americans, or at least those frequenting these site, support the idea of allowing Puerto Rico to declare bankruptcy. Let's face it, if the island can't pay, bankruptcy is far less costly to the taxpayer that a bailout.  As to Washington, it presents the potential for votes and no cost. That's the motherlode in politics. But the public, more broadly, appears to support this view as well.  Who cares if bond investors take one between the eyes?  Unless, of course, it's your eyes.

This raises the broader question, though, is America's willingness to change its bankruptcy laws for Puerto Rico an example of our changing social mores?  Is it now ok not to repay one's debts; that is, as long as it's someone else's money that's not being repaid? Has default become the new black?

What's Wrong with Bernie Sanders' Plan on Social Security and How to Fix it

Presidential candidate Bernie Sanders has done an outstanding job of highlighting the current retirement crisis. He's put forth a fairly credible plan for expanding Social Security, currently threatened with insolvency by 2033. The full text of Senator Sanders' plan, as presented to a Senate hearing in 2011, can be found here and in the Senator's Social Security Expansion Act submitted to Congress in 2015.

Senator Sander's plan is now gaining media attention and a loyal following by Social Security advocacy groups. It relies on promoting the continuing availability of Social Security funding, almost exclusively, through lifting the cap on annual wages subject to the FICA payroll tax, (currently $118,000). US Treasury Secretary Jack Lew actually has a plan to divert a greater portion of the existing FICA tax, in order to fund the disability portion of the Social Security Trust Fund, or OASDI (with the disability program expected to reach insolvency by next year).

As the Senator claims, it is true that a vast amount of wage income passes through private incomes that is not subject to the FICA tax. In fact, IRS data for 2012 shows just under 21 million individual tax returns, or 22% of the total taxable returns filed, with adjusted gross incomes greater than $200,000. A total of 392,850 returns filed showed AGI of greater than $1 million. For these individuals, upwards of 90% of their income is exempt from the FICA tax.

But research indicates that removing the cap on wages subject to the payroll tax would only delay the date of insolvency of the Social Security Trust Fund by a few years. Moreover, by 2035, the Trust Fund would still only be able to pay 85% of projected benefits (rather than the 75% that the Social Security Administration currently estimates).

This brings us to the first point about the projected insolvency of Social Security. Many are now arguing, including Senator Sanders, that in 2033, Social Security won't be bankrupt or insolvent, but rather, that the fund will only be able to pay 75% of projected retiree benefits. Sorry folks, but it's the same thing. When a corporation, government or private individual files for bankruptcy it doesn't mean that they have zero in the bank. Rather, it means that the company's debts or payment obligations exceed their assets or ability to pay their liabilities as they come due. The company is thus considered insolvent. Let's not needlessly confuse the issue with semantics.

That being said, the Senator is entirely correct in his premise that something must be done now given the current level of personal retirement savings, the dramatic abandonment of defined benefit pension plans by Corporate America and the fact that 35% of Americans in retirement rely solely upon Social Security for their income. Like it or not, reforming Social Security is the only place for America to take such remedial action.

But here's what Bernie Sanders has left out of his plan. First, in order to achieve long term stability for Social Security in the face of highly unfavorable demographics, we need to delink Social Security from the payroll tax. Americans need to begin to realize that they haven't paid into a pension plan, for which everyone will receive proportionate dividends in their retirement. In other words, Social Security needs to be means tested. There's no reason why the government needs to pay retirement benefits to Bill Gates. He's fairly well prepared for the expenses of retirement.

Second, while lifting the payroll cap is a good start, ultimately Social Security will also need to be delinked from the tax and the idea that the program can be self-funded. Many nations around the world, including Australia, operate pension plans that are general budget items. Australia's Age Pension System has operated this way for many years and is consistently ranked as one of the world's most successful retirement systems. These and other changes to the Senator's plan can and should be made now, to provide an approach that will restore the solvency of Social Security for future generations.

If you'd like to read more about the retirement crisis and the way to solve it, please check out my new book, "Up in Smoke: How the Retirement Crisis Shattered the American Dream", now available on Amazon, iTunes, Barnes and Noble and other ebook retailers.

Pensions Liabilities Force Layoffs at Chicago Public Schools

Buried beneath the glaring headlines of the debt crisis of Greece and Puerto Rico, lies the under-reported story of the public pension and debt crisis of the Chicago Public School System (or CPS). Facing massive public employee unfunded liabilities and a judicial climate unsupportive of reform, the bonds of CPS, along with those of the City of Chicago were downgraded by Moody's Investors Service to junk bond status this past May. Moody's took the action almost immediately following a landmark decision on public employee pension reform by the Illinois State Supreme Court.

The court struck down a pension reform measure passed by the Illinois legislature in 2014 designed to stem the hemorrhaging of funds to address the state's severely underfunded public employee retirement system. The pension reform plan included provisions to eliminate an annual cost of living adjustment of 3%, while boosting public agency contributions to the system, in an effort to bring the struggling state pension plan to 100% funding in thirty years. 

As to Chicago Public Schools, the Moody's action downgraded $6.2 billion of bonds to junk status. Citing its public employee pension exposure, the rating agency pointed to the stunning growth in CPS' annual pension funding requirements, from $197 million in 2013, to $634 million in 2015.  It is that latest pension payment of $634 million that gave rise to the recent funding crisis for CPS,as the district found itself simply unable to pay. With the deadline for the contribution of June 30 approaching and no extension possible, CPS sought a variety of measures to help it keep from default on its pension contribution.

When the smoke cleared last night, the payment was made, but we now learn at the expense of 1,400 salaried positions at the School District. In reporting on its plan to make payment on its public employee pension obligation, CPS made mention for the first time of its plan to eliminate 1,400 positions in an effort to reduce expenses by $200 million to bring its budget back within its limits. Faced with a sudden and previously unannounced plan to lay off teachers, the President of the Chicago Teachers Union claimed, " Mayor Emmanuel's handpicked board has led this district over a financial cliff."

Unfortunately, this may not be the last time we hear these or similar criticisms of local government in the years ahead. CPS will have a payment of this or larger proportions in 2016, as well.

Oakland, CA and the Public Pension Crisis

When I started out researching the finances of the City of Oakland, I fully expected to end up in a very different place than where this story actually ends. I knew that Oakland was struggling with pension liabilities so I thought by chronicling the effect of growing pensions on the city's finances, I might create a reasonable case study of how public employee pensions are weighing on mid-sized American cities.

If we step back to 2001, the city made contributions to CalPERS, the statewide pension administrator, of $24 million, funding 100% of it annual pension contribution or APC. Its net pension obligation was zero. Pension costs for the city's FPRS closed-end pension plan were funded in 1997 by way of a cash contribution of $22.8 million, and supplemented in that year by the proceeds of a pension obligation bond (POB) of $417 million. As a result, the program was projected to be fully funded through 2011 (although its unfunded pension obligation should be adjusted to include the $417 million of unpaid bonds).  

By 2005, however, an unfunded actuarial accrued liability (UAAL) appeared in FPFS of $268 million and its funded status had dropped to 69%. At the same time, the city's CalPERS account showed a combined UAAL of its public safety and miscellaneous employees plans totaling $370 million. The city's annual contribution to PERS had grown from $24 million in 2001 to $87.5 million by 2005, an increase of 265% in just four years. Over the same period, the city's general fund revenues had only grown by just 34%.

By 2014, the city's pension liabilities would begin to look downright ominous. The UAAL of FPRS had declined to $230 million, representing the closed-end nature of the plan and the smaller retiree population covered by the plan. Nonetheless, its funding status had fallen to 64%. And the city's combined PERS liability for its safety and miscellaneous plans had now grown to a staggering $1.13 billion, or nearly four times the size of its payroll. It's annual PERS costs had risen to $98 million.

Now, I know what you're thinking. What about the debt service on all the POBs that the city had issued to fund its UAAL. The city issued $417 million of POBs in 1997 to fund a deposit to FPRS and, in 2012, another $212 million to refund, in part, the 1997 bonds. The debt service on these bonds totalled $50 million in 2014. So this number should effectively be added to the $98 million PERS costs mentioned above, producing adjusted annual pension expense for the city of $148 million in 2014.

So this is about where I thought this story would end. The city's annual pension costs had risen from $66 million in 2001 to $148 million in 2014 (inclusive of debt service on POBs), while its unfunded pension liability had grown from $417 million to $1.7 billion (inclusive of POBs). But here's what I didn't expect to find: how well the city administrators and elected officials would address these costs.

Oakland, like many cities in California and across the country, is still struggling to recover from the 2008 recession. For Oakland, property tax revenues lost following the recession did not recover to their 2008 levels until 2013. Today, six years after the recession, Oakland property tax revenues remain just marginally higher than in 2008. Sales tax and state directed motor vehicle license revenues still haven't climbed back to their pre-recession levels. Revenues, overall, are now only modestly higher than their peak. Nearly all of the revenue gain came on the basis of locally enacted taxes for business licenses, utilities, real estate transfer, transit occupancy, parking and franchise taxes.

So here's the unexpected ending to the story. Clearly, Oakland still faces extraordinary unfunded pension liabilities in the face of limited revenue growth, all of which is pressuring its budget and bond credit ratings. But the city has managed to dramatically reduce the size of its budget to live within its means. In fact, its general fund expenses in 2014 were below those of 2008, allowing the city to record an $8.2 million addition to fund balances. The city accomplished this no small feat with the reductions coming largely from general government, allowing the restoring of funds for pubic safety to pre-recessionary levels.

What the future now holds for Oakland and other US cities is predicated on assumptions for economic growth that cannot be known. At thee same time, pension expense will most surely grow, irrespective of revenue growth, as a function of salary increases, enhanced benefits and demographics. Not a pretty picture, yet thus far, the city has done an extraordinary job of containing the damage.

What's Wrong with Social Security and Why it's Important to Gen X and the Millenniums- Part Two

We're all familiar with the payroll taxes that support Social Security, simply by looking at our pay stubs. FICA taxes, or required employee and employer payments under the Federal Insurance Contributions Act, provide the foundation of financial support for Social Security. 

The total FICA tax is evenly split between the employer and the employee, with each paying a tax equal to 6.3% of earned wages for a total of 12.6% (as of 2014). The payments are directed to the Internal Revenue Service and then paid into the Social Security Trust Fund (also known as the Federal Old Age and Survivors Insurance Trust) where they are administered by the Department of Treasury.

For many years, approximately 70, the system worked just fine with annual inflows to the Social Security Trust Fund from taxes and interest, exceeding outflows, in the form of benefits payments to retirees and the expenses of running the system. But in 2013 these lines would begin to cross as the number of program beneficiaries would rise to 62 million, and outflows would exceed inflows. The deficit of the Trust Fund in that year would total $75 billion, a level at which deficits are projected to continue through 2018 (whereafter they are projected to spike sharply upwards).

The problem with all of this is largely the basis of accounting by which the Trust Fund is managed and operated. Unlike defined benefit plans run by corporations and governed under ERISA, no such regulation guides the planning, management and investment of Social Security. Social Security today runs as it always has, as a PAYGO system. Revenue flows in from taxes paid by current workers (and employers) and flows out to retirees and services, each on an annual basis. In effect, we are borrowing from Peter (today's workers) to pay Paul (retirees). Some refer to this as a Ponzi Scheme, although that's perhaps a bit too harsh. Nonetheless, this is essentially how the system functions.

Under ERISA, companies are required to retain actuaries to quantify the present value of future, accrued benefits. They are then required to invest to meet those future liabilities. But this is not at all the way Social Security works. And it's this failure to to do so, that has allowed the Trust Fund to rise and fall with demographics. It's almost as if we knew this day of reckoning would come, when demographics would threaten the solvency of Social Security, but no one ever chose to address it.

Today Social Security reform is the third rail of politics. Everyone knows some level of reform is necessary, but to propose any modification prompts outright ridicule. Yet, with the median retirement savings of 55-64 year olds only $14,000 this generation, like those currently in retirement, will need to receive Social Security benefits just to make ends meet.

If you are interested in reading further about this topic, a full plan for Social Security reform is presented in my new book, "Up in Smoke: How the Retirement Crisis Shattered the American Dream". You can access it here.

CBO 2015 Long Term Budget Outlook

A new report of the Congressional Budget Office was just released. The report projects future budget deficits for the Federal Government through 2040. 

The report highlights future growth in spending on Social Security and health care as two principal drivers in growing deficits. Spending on these two programs alone is expected to grow from its current level of 10.1% of US GDP to 14.2% by 2040.

With current law unchanged, the CBO projects that total federal tax revenue will grow as a percentage of GDP from 17.7% in 2015 to 19.4% by 2040. At the same time, federal spending is projected to grow from 20.5% of GDP in 2015 to 25.3% in 2040. And therein lies the rub. Expenditure growth at rates considerably in excess of that of revenues. I guess you could say the government loses money on every dollar and can't make it up on volume. 

Annual budget deficits are projected to grow from 2.7% of GDP in 2015 to 5.9% by 2040. With growing deficits, the CBO forecasts that total federal debt will exceed 107% of GDP by 2040. Now this raises an important point about how various government agencies and economists measure total US debt and its relationship to GDP. 

According to data of the Federal Reserve Bank, as shown in the chart above, total debt to GDP already exceeds 100%. So why is there a discrepancy in the CBO report? It's a question of whether debt is measured on a gross or net basis. Since a healthy chunk of US Treasury debt is owed to Social Security and other federal programs, like Medicare, this portion of the debt is often netted out, under the theory that "we" owe it to ourselves.

Well, perhaps, but if you are now or are expected to be a recipient of Social Security or Medicare benefits, then it's owed to you. The Social Security Trust Fund is now the world's largest holder of US Treasury obligations, some $2.7 billion of them. The CBO report projects the Trust Fund to become insolvent by 2029. In the CBO's 2008 long term outlook, Social Security was expected to remain solvent until 2050. 

Please see my new book Up in Smoke: How the Retirement Crisis Shattered the American Dream, on Amazon now.