PGPF Blog

Peterson Institute Releases Special Report

May 6, 2009 | Posted by Rob Fishman

The Peterson Institute for International Economics has released a special report on America's long-term economic prospects in the international arena.

"In the absence of long-term fiscal consolidation," the report warns, "the US current account deficit over the next 10 to 20 years is likely to soar to several trillion dollars annually and well into double digits as a share of the economy."

Available at the Institute's bookstore, the report is authored by C. Fred Bergsten, and draws on conclusions made by participants in PGPF's 2030 summit, held last December in New York. Attending the summit were Paul Volcker, Alan Greenspan, Robert Rubin, George Soros, and Pete Peterson.

1 Comment

Re: Special Report

On May 17, 2009 1:35 AM, imademedoit said:
Most of what this report recommends must occur in tandem with rapidly growing burdens on our domestic resources. If we continue to milk international resources to fund for the USG things for which we are unwilling to pay in taxes, then services/entitlements ultimately must be slashed, while hundreds of billions of dollars annually will flow to foreign accounts as interest on debt. The Social Security and Medicare Trustees remind us again of a future that awaits absent change.

In the "Summary Report" of the 2009 Social Security and Medicare Trustees Reports, we read:

>>The Medicare Report shows that the HI Trust Fund could be brought into actuarial balance over the next 75 years by changes equivalent to an immediate 134 percent increase in the payroll tax (from a rate of 2.9 percent to 6.78 percent), or an immediate 53 percent reduction in program outlays, or some combination of the two. Larger changes would be required to make the program solvent beyond the 75-year horizon (ii).<<

>>Social Security could be brought into actuarial balance over the next 75 years with changes equivalent to an immediate 16 percent increase in the payroll tax (from a rate of 12.4 percent to 14.4 percent) or an immediate reduction in benefits of 13 percent or some combination of the two. Ensuring that the system remains solvent on a sustainable basis beyond the next 75 years would require larger changes because increasing longevity will result in people receiving benefits for ever longer periods of retirement (iii).<<

A reality check is wanting: beyond the 75-year actuarial horizon is what they call the infinite horizon. At some point longevity most assuredly will peak. Otherwise, we are embracing the notion that the human lifespan forever will grow longer, to 120 to 150 to 200 to... years. Though impossible to rule out, prudence suggests there are limits to this gain. Moreover, if the gains we do realize in longevity combine with more years of physical vigor and mental acumen, then "naturally" people will push off retirement accordingly. For, retirement, in general, is about a period of rest during one's physical and mental decline. If we manage to avert this decline for more and more years, then people naturally will work more years. But, that all is "then" and a long way off; our problems are in the near horizon.

Currently, payroll deductions are 15.3% of payroll: OASI (10.6%;) DI (1.8%;) HI (2.9%.) To bring these accounts into actuarial balance---a term concerned only with the 75-year horizon---the Trustees are suggesting immediate payroll deduction increases of 5.88%, upping the payroll deductions to 21.18% of payroll. Or, we need to reduce immediately HI outlays by 53% and OASDI outlays by 13%. Or, we need some combination immediately. The "immediate" in this context means any postponement of the remedies will require more medicine (taxes/cuts) in the future. It, also, is important to note and understand that the employer contributions here reduce what otherwise would be in employee paychecks; hence, employees bear the full burden of these payroll deductions.

In another context of "immediate:"

>>A more immediate issue is the growing burden that the programs will place on the Federal budget well before the trust funds are exhausted (11). ... by 2016, net revenue flows from the general fund [to the HI & DI trusts] would total $369 billion... (12).<<

(See graph below.)
This $369 billion would be to cover the dwindling interest due to the HI & DI trusts and the HI & DI trust principal redemptions. However, up to this point, it is the borrowing of interest due to the OASI trust and the OASI surplus from payroll deductions that covers all or most of the HI & DI deficits. This is a "general-fund draw" only in that before the HI & DI deficits, the HI, DI, and OASI interest and surplus each year was borrowed/spent on other spending in the budget. Around 2017, the OASI trust goes into deficit (no more surplus from payroll.) From 2017 to around 2024, the interest due to the OASI trust will cover OASI deficits and continue to divert (in dwindling fashion) towards HI & DI costs while increasing the balance (debt) of the OASI trust since the OASI deficits are not requiring all interest due. From 2024, or so, forward, the OASI trust will require all interest due to it plus principal redemption, and by 2037, the OASI trust itself is insolvent.

So, to restate it, the OASI interest and surplus diverts to cover HI & DI trust deficits until around 2017. Beyond 2017, OASI payroll surplus is no more. (Even though the HI and DI trusts are insolvent by 2017 and 2020, respectively, OASI interest likely will continue to help cover these program outlays beyond receipts, as well as OASI deficits.) Beyond 2024, the OASI trust deficits will be such that it needs all of its due interest and more.

Interest due to the trust funds and principal redemptions from the trust funds all requires general-fund cash. When trusts are not in deficit, the general fund credits the trusts with non-marketable securities (interest-bearing IOUs) and spends all the surplus cash on other things. When trusts go into deficit, the general fund must (per law) divert the cash to cover the deficit(s), meaning things once funded by this surplus cash must now be funded by some other means or scrapped. As trust deficits grow, not only has the general fund lost the surplus, but it must divert more and more general-fund cash to the trusts for interest due and principal redemptions. This, in part, is what the Trustees mean when saying, "A more immediate issue is the growing burden that the programs will place on the Federal budget well before the trust funds are exhausted."

Some might think that if a simple 5.88% increase in payroll deductions will solve this at least for 75 years, then "just do it." Yet, this all is a mouse of a problem relative to the two elephant problems of SMI (Parts B & D) and Net Interest (interest on public debt.)

Growing SMI and Net Interest burdens will require massive amounts of general-fund cash to fund. If we continue to allow the USG to fund its cash shortages via more borrowing from the public, then the Net-Interest burden only grows geometrically.

There is no denying that the vast majority of the public debt through 2008 is the result of not paying the Net Interest, except with borrowed dollars. From 1975-2008, the sum of Net Interest (Net.i) due is $5.28T, while the public debt grew by $5.46T over the same period.

The public borrowing and the proposed public borrowing from 2009-19, dramatically extends the red bar relative to the blue bar above, meaning the public borrowing is becoming far greater than just to cover the Net.i due, as had been the case almost exclusively since 1975. It also means that we still are not paying (except via borrowing) the public-debt (Net.i) burden.

Will the pressure to borrow more from the public decrease as we move beyond 2019 and the OASI trust requires more and more of its interest due and large/growing redemptions of its principal? Those who think this increased public borrowing translates into an "investment in our future" are patently and disastrously mistaken. All we're "investing in" is a faster trip along the downward spiral.

When the USG no longer can borrow more, the general fund, somehow, will have to cover the burdens of Net.i, trust interest due, trust principal redemptions, and enormous SMI outlays. In short, absent gargantuan change in tax/premium/entitlement laws, the USG soon will have the funding to pay for little else.

It's all not worth fretting much over. After all, the best-n-brightest have led us here repeatedly throughout history. Persons in the know, however, will start planning and preparing for a future in which the USG will be digging itself out of debt. And, it will do so with the same pain and sacrifices that any household or business must endure after burying itself in debt---except bankruptcy court won't be a relief option. In other words, the USG's income will remain relatively constant (if we're lucky,) and it will slash all nonessential spending in order to make the debt-reduction payments.

Since the free lunch does not exist, we sooner or later must pay for the lunch. I guess this notion and pursuit of the free lunch should come as no surprise, when the same "mentalities" hotly pursued and spent fortunes chasing the notion of a "Fountain of Youth" in times past. Routinely, the output of the best-n-brightest leads us into economic calamity or collapse and by extension political upheaval.

In times past, there always was a minority among the best-n-brightest arguing against the self-destructive policies of their given leadership. Today is no different. Likewise, today, it appears the majority of the best-n-brightest and otherwise are refusing to listen.