Monday, March 20, 2006

Federal trust funds being stolen and spent by government - Is government avoiding problem because it's too late to fix?

If people knew a catastophe was about to occur, I think it's assumed that most people would fight to avoid it. Like a crack appearing in a major dam, or a missing section of railroad track, people would rush to fix the problem and avoid the disaster. So is the case, I would hope, for governmental programs that are destined to end in crisis, even if only an economic crisis. Once the flaw is exposed, legislators would rush to repair the flaw and avoid the crisis. But what should people think when such an obvious flaw is apparent in a massive government program, and government won't fix it? What should we think when the flaw was put their by design?

For decades social spending in America has been on the rise. The bulk of that spending is in what are called entitlement programs, such as Social Security, Medicare, and Welfare. Through adjustments in taxation and outlays, government has funded these programs even though fewer Americans support what is a growing number of Americans who are recipients. Since the 1980s, through the use of taxation that produces revenues that exceed outlays, these surpluses have been placed into what the government calls trust funds. These funds are advertised by the government as ready to be used to make up the difference when population demographics increase the percentage of Americans on the receiving end of these benefits to levels unsupportable by working Americans pay into the plans. In simpler terms, pay the benefits to the baby boomers when taxes can't support benefit payments.

The graph above depicts United States government spending since 1980. It is adjusted for inflation and shown in 1980 dollars, so it represents the real growth of the major parts of the government:
  • National Defense
  • Social Spending
  • Physical Spending
  • Interest on the Debt
  • And other spending
The pink curve represents the growth of social spending. Since 1980 social spending in Ameirca has doubled in inflation-adjusted dollars. Defense and the rest have had their ups and downs, but social spending is out of control. Social spending will account for 63 cents of every federal dollar spent this year, and nearly 70 cents per dollar in 5 years. And it gets worse from there.

The National Debt currently stands at around $8.27 trilllion dollars, or about $27,500 for every man, woman and child in America. $3.47 trillion of that debt is currently held by the government in the form or Treasury securities. Of that, roughly $2 trillion is what the government alleges makes up the Social Security and Medicare trust funds. Those trust funds represent the security net for America when the boomers begin retiring and government revenues are inadequate to fund their benefits.

What would we do without those trust funds? Well, we're going to find out because they don't exist. And if we don't do something right away, another $3 trillion is going to be stolen and spent by this government only making things worse.

So what is the trust fund? Simply, it's the jar under the bed filled with the IOUs the government has put in it after it has borrowed and spent the money. Yup, the surpluses are gone. They've been spent. The government has borrowed $3.47 trillion dollars from overtaxed Americans and spent it to artificially lower annual deficits and fund unfunded spending.

Imagine that you plan to buy a car in 5 years, but you don't trust banks. You decide to put $100 a week into a jar under the bed, assuming that in 5 years you'll have $26,000 for that new car. After the first couple of months you look at that jar and see those hundred dollar bills and you have this great idea. What if you borrow the money from the jar and replace it with a $100 IOU each week. You can party, eat out, do whatever you want with the money because that jar will still have the savings for your new car in 5 years.

At the end of that 5 years, what do you have in that jar? Because you borrowed the money from yourself, you are liable to repay the jar. Basically, the money is gone! And there is the government trust fund program in a nutshell. The government has borrowed $3.47 trillion from itself and spent it. That's $2 trillion from Social Security and Medicare that is now gone.

So what will the government have in the trust fund in 2015 when entitlement outlays exceed revenues? What will the government do when there are no other surpluses to steal to fund the entitlements?

So why won't the government fix this? President Bush has proposed privatizing portions of Social Security as a start. Do people not understand what is being proposed? Bush's proposal is to invest the surpluses outside the government. By investing them somewhere outside the Treasury, whether the stock market, gold bullion, real estate, whatever, they will be invested in something that will return some, all, or more than what was invested in the future. Even if invested at a loss, there were still be something, compared to nothing as long as we continue to borrow and spend those funds as soon as collected.

So why are Democrats opposing such a basic fix to an obvious flaw in trust fund investments? The law requiring investments in Treasuries probably happened while they were in control of Congress, but can this be purely politics? Kind of a destroy our economy as long as Democrats can stay in power thing? Or maybe they just like having the surpluses to spend?

Why aren't Republicans fighting harder to reform this system before it bankrupts America? Is the thought of real cuts to adjust for the loss of the stolen trust funds too much for them too?

So back to my analogy that started this off about cracks in dams or missing sections of railroad track. If a problem can be fixed, people will almost always jump to fix it. But should we be worried that our federal government won't even try to fix this problem?

What would people do if they found that crack in the dam and it was clear that a break was iminent? What if the passenger on the train sees the missing segment of track and knows that there is no way the train can stop before derailing? In both instances those people would probably run like hell. Is that what our government is doing on the issue of entitlements today? It can't be fixed so let's just enjoy the time we have until the whole system collapses?

Whatever the reason for inaction, or downright opposition to saving America, this is not some small problem that is going to fix itself. And every day that the government does nothing, more of our trust funds are being stolen and spent.

Update: Want some ammunition to rebut liberal arguments that we spend too much on defense and not enough on children? Check this out:

Since 1980, which was the last year of Carter's decimation of America's defense, and adjusting for inflation, defense spending in 2006 is 48.5% larger than in 1980. In 2006 we are in a war against terrorism and fighting to bring democracies to Iraq and Afghanistan.

$134 billion in 1980 compared to $199 billion in 2006 (1980 dollars)

The growth of social spending, again adjusted for inflation and relative to 1980, which was near the end Carter's increases in social spending, has not only outpaced the growth of defense spending, but is more than twice the growth rate. Between 1980 and 2006, social spending in America has grown by no less than 102%.

$313 billion in 1980 compared to $634 billion in 2006 (1980 dollars)


Anonymous said...

Your "social spending" doesn't factor in social security, right? After all, very few poor kids get social security, while many, many wealthy individuals get social security.

If it is factored in, then that would be a reason why "spending" has gone up so much. Lots more old people.

Mike Costello said...


Social Spending includes, in their order of spending, Social Security & DI, Medicare, Welfare, Health Services, Veterans Services, and other social services.

In rough numbers, adjusted for inflation in 1980 dollars, and relative to 1980 spending, in 2006 Social Security will have increased 73.7%. Medicare is up 296.8%, Welfare is up 54.7%, Health Services 330.7%, Veterans Services 23.5%, and other social services up 27.8%.

As stated earlier, Social Spending will make up 63 cents of every dollar spent by the Federal Government this year. In 5 years at current trends, that will grow to 68 cents of every government dollar spent. And it gets worse from there as the boomers will only have begun to retire.

Anonymous said...

What you don't mention is the fact that government spending is only one part of the equation. "Guv'mint Spending" is the numerator, while "The Size of the US Economy" is the denominator. Sure, guv'mint spending has gone up, but the size of the economy has gone up too. Inflation adjustment has little meaning. The US economy has increased in size greatly since 1980 (with the largest increase coming during the Clinton Go-Go '90s), while government spending has either outpaced GDP growth of has lagged behind it.