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$237 Billion Government Surplus Tops
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October 24, 2000
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Here's the truth - If you care
11/13/2000
Papering Over the National Debt
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By Sheila R. Cherry
cherry@insightmag.com
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Clinton and Gore talk about reducing the national debt, but it turns out that the debt has made a record jump on their watch. Read about this federal Ponzi scheme – and weep.
This year Congress authorized expenditure of near-record levels of tax revenues, lending credence to claims of cynics that any federal surplus that remains in Washington is destined to be spent on pork and more programs. Fiscal hawks and taxpayer advocates want at least some of that over-taxation to be shifted to pay down the national debt. According to the Bureau of the Public Debt at the Treasury Department, the federal government owes more than $5.6 trillion. In 1992, the year Bill Clinton and Al Gore were first elected, this debt totaled only about $4 trillion — which means that on their watch they have added more deficit spending than during any other administration in American history.
As the years have passed, more and more we no longer owe that debt to ourselves, as the now-discredited Keynesians used to say. Now it is foreigners — governments, companies and individuals — who have extended 40 percent of the credit needed to keep the U.S. government operating. As global financial crises have sprouted over the years, foreign investors have sought out the safety of the “full faith and credit” of the people of the United States.
One problem is the possible threat of creditor retaliation, making the United States vulnerable to dollar depreciation — the so-called monetizing of debt — or economic depression from the huge credit contraction and skyrocketing interest rates that would result should Uncle Sam have to go into the U.S. credit markets to make up for foreign investors strategically selling off their portfolios and moving them elsewhere. Investors in mainland China and the Organization of the Petroleum Exporting Countries, for example, hold more than $93 billion of the $1.26 trillion foreign-held Treasury securities.
Economic warfare targeting the U.S. debt is not nearly as likely, say analysts, as the possible capital needs of lending countries to address demographic problems. Just as the U.S. population is aging, so are the populations of creditor nations. If foreign-held public debt has not been brought under control as this problem escalates during the next 20 years, says Robert Bixby, executive director of the Concord Coalition, it will mean big trouble. He advises that “we should be getting our own debt down right now because we probably won’t be able to borrow at the same level from foreign sources to finance our debt in the future. They may not be as willing to invest here. They may want to keep their money at home.”
Sure, $1.26 trillion in foreign-held public debt is a lot, say debt managers, but Treasury officials are quick to note that the amount of debt the government owes to the public generally, including foreigners, has been decreasing in recent years — which it has. But this is so because of a little bookkeeping sleight of hand whereby the government has been borrowing more from itself, essentially exchanging public debt for government debt. Rep. Cass Ballenger, R-N.C., describes the public debt as borrowing by selling U.S. Treasury bonds to mutual funds, individuals and foreign investors. “Government debt,” he explained in a 1999 radio address, “is held by the Social Security trust fund, the highway and aviation trust funds, as well as military and civilian retirement programs.” In short, the politicians have been pawning their own employees’ pensions and our own federally enforced savings.
The fiscal 2001 budget document clearly states, “The holdings of federal securities by government accounts are estimated to grow to [$2.46 trillion] by the end of 2001, or 43 percent of the gross federal debt. The percentage … is estimated to rise further as the budget surpluses reduce the debt held by the public and the trust funds continue to accumulate surpluses.”
Using a bookkeeping device that never would be allowed to trustees of corporate pension plans, the federal propensity for financing itself by looting the trust funds is an increasing trend. In turn, the Treasury promises to pay the money back when current income no longer exceeds claims, less interest. This is predicted to be needed around 2015 — which means the current pack of politicians are proposing to “save” Social Security by bleeding the tax surplus back into the trust funds they have looted until such time as they opt to loot them some more.
Bixby compares the situation to a balloon loan, where the current state of the debt is paper IOUs. But in 2015, the Treasury will have to generate hard cash to redeem those government IOUs as it currently must to redeem publicly held debt. “And if we also still have a big public debt burden at that time, it means that we’re going into it from a position of less strength than we would otherwise.”
The Social Security surplus represents 61 percent of the money that the Treasury has borrowed from government trust funds. The civil-service retirement and disability fund accounts for another 13 percent, and the military retirement funds, 3 percent.
The tax revenue collected for the government’s nearly 200 trust funds is earmarked for specific purposes. For instance, the Old-Age and Survivors and Disability Insurance (OASDI) programs are to underwrite the costs of retirement, survivor and disability benefits of eligible individuals. This is the sort of program that has been looted. So what would be the significance of an unforeseen inability to convert outstanding debt held by such retirement trust funds to cash? Consider these facts provided by the Social Security Administration’s Office of the Chief Actuary:
About 154 million persons will work in OASDI-covered employment or self-employment in 2000;
About 96 out of 100 workers in paid employment and self-employment are covered or eligible for coverage under the OASDI program;
95 percent of the people aged 65 and older at the beginning of 2000 either were receiving benefits or would be eligible for benefits when they or their spouses retire;
About 98 percent of the children younger than 18 and parents with children younger than 16 are to receive monthly cash benefits if a working spouse dies; and
About four out of five men and women ages 21 to 64 are to be paid monthly cash benefits in the event the wage earner suffers a severe and prolonged disability.
But the fiscal 2001 budget reports: “Altogether, Social Security and these two retirement funds account for 77 percent of the investment by all government accounts during this period. At the end of 2001, they are estimated to own 75 percent of the total debt held by government accounts. The largest other holdings are by the hospital insurance trust fund and the unemployment trust fund.”
The debt “borrowed” from the trust funds, also referred to as government account series bonds, “assets” or “Treasury IOUs,” has grown from less than $46 billion under Ronald Reagan in 1986 to more than $1 trillion under the Clinton/Gore administration in August 2000. Whatever they are called, the bonds being purchased by the Social Security system represents future debt and therefore, potentially, future taxes, hideous inflation or a credit crunch and depression. The readiest asset the Treasury has to make good on its promises to repay its debt obligations, Bixby notes, is the government’s power to tax.
Meanwhile, the interest on those Treasury bonds is part of the interest paid on the national debt — and the third-highest expense to taxpayers in the federal budget. “If you are the Social Security administrator, those bonds are an asset, because they give you a claim on the Treasury,” Bixby explained in a recent interview. But if you happen to be the Treasury secretary, he adds, they are a liability. “Because some day, whenever Social Security needs the money, the general taxpayers are going to be on the hook to come up with that money to pay Social Security benefits.”
“The invested assets of the Social Security trust funds have been rising over the past several years,” reports the SSA, as if boasting of wise investments prudently made, “both in terms of dollar amounts and as a percentage of all interest-bearing debt of the United States government.” But despite their characterization as assets, repeats Bixby, “In no way are they assets. They don’t represent savings. They represent a claim on future general revenues.” Any downward trend of the publicly held debt is a good thing, says Bixby, because it would mean the government was paying off debt that it owes to its outside creditors. This also is why using surplus tax to replace Social Security debt is a good thing, as opposed to increasing taxes simply to fund ever-greater Social Security expenses.
However, like the difference between owing a landlord $500 and owing oneself $500, the increasing trust-fund debt is a deceptive bookkeeping device. But from a political or bureaucratic perspective, if the debt is held internally it doesn’t seem as likely to provoke public wrath as if it more readily could be identified as owed to foreign interests.
As one official explained it in a towering obscurity, “Taxes and ownership of debt are simply transferring in the form of debt financing versus interest payments,” because the people who are paying the money into the system are getting money out of that same system. If the debt is foreign-held, however, the money goes abroad in order to service the debt instead of being recirculated into the national monetary system.
The government does have to do something with any trust-fund surplus, explained Bixby, because in 1983 it purposely set Social Security payroll tax rates higher than was needed to pay current benefits. The payroll tax therefore generates more than the Social Security system needs to pay benefits at the moment. So, with an “excess of cash” coming into the Treasury for this Ponzi scheme, the question was “What do you do with it?” he notes. “Up until last year, what we did with it was pay other bills,” so the trust fund got an IOU in the form of a Treasury bond.
Last year, there was even an overall tax surplus without counting the Social Security margin of income over outflow, and so the difference was used to redeem publicly held debt, Bixby pointed out. “When you hear politicians talking about paying off the national debt within 10 years or so, they are only talking about the publicly held debt. The trust-fund debt could actually increase over that time. So the total national debt would actually go up because it would include the trust-fund debt,” Bixby says.
One government official, on condition of anonymity, agreed to outline for Insight readers four possible scenarios if the federal government is faced with an unanticipated debt crunch:
If a large amount of debt were budgeted, the government presumably would have to offer debt instruments with higher interest rates;
If a large portion of debt were foreign-held, there would be the potential for political or financial leverage if a significant part of that were concentrated in the hands of a single or a few nations, entities, companies or individuals;
The government’s need for debt could crowd out the pool of capital available for private businesses, raising interest rates and choking the economy. Government’s demands for more of the pool of lendable money would be met because it would be considered a safer lending prospect in a time of economic storm; and
Creditor confidence that the United States can meet its debt could be affected by a growing burden. While the lending risk of other countries may be considered less safe, if U.S. federal debt reaches unbearable percentages of the gross domestic product (GDP), the United States might not be able to find the money to borrow and be driven to monetizing, or inflating, the currency as occurred in Germany after World War I to pay off debt and reparations.
Little wonder that issues involving federal debt seem obscure to many of the general public. But it comes down to this: In the mid-1990s the United States was running trillion-dollar on-budget and unified deficits. Political leaders had to choose between either raising the cash or issuing bonds to further expand and refinance the debt. Lacking a surplus in the general fund, and being unwilling further to raise taxes, they chose to fund extravagances with the surpluses in various retirement accounts. In the private sector such activity would be against the law, but since there always will be citizens to tax in the future, public “embezzlement” of government trust funds to carry growing debt was tolerated.
Now the issue has come home to roost. During the third and final presidential debate in October, a sixth-grade teacher named Thomas Fisher asked Vice President Gore and Texas Gov. George W. Bush a question certain to haunt the presidency. Fisher’s class at St. Clair School wanted to know, “Of all these promises you guys are making, and all the pledges, will you keep them when you’re in office?”
Gore responded: “We have gone from the biggest deficits, eight years ago, to the biggest surpluses in history today.… Instead of ballooning the debt and multiplying it four times over, we have seen the debt actually begun to be paid down. I will balance the budget every year. I will pay down the debt every year. I will give middle-class Americans tax cuts — meaningful ones. And I will invest in education, health care, protecting the environment and retirement security. We both made promises in this campaign. I promise you, I will keep mine.”
Then Bush assured, “And one of my promises is there’s going to be Social Security reform, and you bet we need to take a trillion dollars out of that $2.4 trillion surplus. Now, remember, Social Security revenue exceeds expenses up until 2015. People are going to get paid. But if you’re a younger worker, if you’re younger, you better hope this country thinks differently, otherwise you’re going to be faced with huge payroll taxes or reduced benefits. And you bet we’re going to take a trillion dollars of your own money and let you invest it under safe guidelines to get a better rate of return on the money than the paltry 2 percent that the federal government gets for you today. That’s one of my promises.”
The kids in Mr. Fisher’s sixth-grade class had every right to ask that question. They have a vested interest in the outcome. In 2015, when the baby boomers begin to retire and the Ponzi game becomes obvious to the merest tyro, Mr. Fisher’s sixth-graders will be 26 years old.
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