“There is a date certain” when Social Security and Medicare trust funds will be empty, and Millennials and the members of Generation X will be left to pick up the pieces, one of the nation’s leading economists says.
But that is only part of his gloomy forecast.
“It’s hard to be very optimistic,” J.D. Foster, chief economist for the U.S. Chamber of Commerce, said Oct. 5 in Raleigh during the NC Next Conference sponsored by the North Carolina FreeEnterprise Foundation.
His presentation took place two days after the announcement that the federal debt accumulated during President Obama’s two terms reached $9 trillion. The federal debt amassed under all 43 previous presidents totaled $10.6 trillion.
“It wasn’t the Russians, and the Chinese, and the Mexicans, or anybody else. We did it to ourselves, which means we can fix it,” Foster said.
“The only thing that’s missing is not the solutions. What’s missing is the political will” to rein in exploding entitlement costs such as Medicare that are gobbling up the federal budget, Foster said. “The American people have to demand it.”
Bob Bixby, executive director of The Concord Coalition, based in Washington, D.C., agreed.
“The budget deficit in the fiscal year that just ended on Sept. 30 went up pretty substantially, from $238 billion to $600 billion or so, and it is projected to go up pretty much forevermore” as Baby Boomers move into Social Security and Medicare, and health care costs continue to grow, he said. “Right now our fiscal budget policies are deemed to be unsustainable.”
Under Obama there were four consecutive $1 trillion-plus deficits, Foster said, “and I haven’t heard anybody talk about irresponsible” as the deficit-to-Gross Domestic Product ratio “shot way up,” enlarging the federal debt. Deficits above $1 trillion are forecast for the next six years under current projections.
Foster said $14 trillion in government debt was sold to the public to pay Social Security benefits, for defense spending, and other purposes. Adding the Social Security and Medicare trust fund debt pushes the total to $19 trillion.
The more relevant number is unfunded obligations in those programs that are between $70 trillion and $100 trillion, he said. Trust funds are just “fabrications of budgetary accounting. They really don’t mean anything from a fiscal standpoint.”
Entitlement spending on Social Security, Medicare, and Medicaid “is simply crowding out everything else the government wants to do,” Foster said.
In fiscal year 2000 entitlements accounted for $951 billion, or about 52.8 percent of a total $1.8 trillion in spending. By fiscal year 2015 entitlement spending was $2.3 trillion, or 62.3 percent of a total $3.7 trillion outlay. By fiscal year 2026 entitlements are expected to cost $4.1 trillion, or 65.7 percent of total spending of $6.2 trillion.
“There’s a date certain when that trust fund goes to zero” if Social Security is not reformed, Foster said. “It means that everyone in Social Security is going to get a 21 percent cut in their benefits.” Without reform, Medicare’s trust fund will evaporate, too, making it impossible to pay for seniors’ hospital bills.
It doesn’t matter whether Hillary Clinton or Donald Trump is elected president. “What they’re left with is an environment [with] very few options” that are palatable or easy to sell to the American people, Foster said.
Foster said he is reluctant to ever use the word fiscal policy “because policy implies intent. There’s very little about the fiscal outcomes that come out of Washington these days that have anything to do with intent.”
Yet some policymakers and politicians say the economy is growing.
“We are now in the seventh year where the economy has been either in recovery or expansion. That’s a good long run,” Foster said. “We’ve created millions of jobs. The economy in those respects has done pretty well.”
On the other hand, he said, “economists like me and people who do economic forecasting have worn out the Thesaurus trying to find synonyms for the word ‘weak.’”
The historical average of an economic recovery is six years before another recession.
“We’re already on, by historical norms, borrowed time. Probably not in the near term, but we are going to have another recession, and we’re not in a very good position to accept it,” Foster said.
The Congressional Budget Office tracks the economy’s potential, compared to actual results. Those two tracks should have closely matched up between 24 and 36 months into the recession. “We’re not there yet,” Foster said. While they are growing closer, it’s because the measure of what the economy is capable of producing “has degraded substantially.”
The economy grew a little better than 2 percent in this recovery, “and that is the weakest recovery on record,” he said. In the first half of this year it grew at about 1 percent.
Among other things, Foster said:
- Federal debt-to-GDP ratio was less than 32 percent for most of the postwar period. It “has shot up to about 72 [percent],” and continues to rise.
- The deficit will explode when interest rates return to normal levels. The 10-year Treasury bond rate today is around 1.65 or 1.7 percent, and would increase “toward 4.5 percent,” increasing the amount of tax money used to service the debt from $220 billion a year to $800 billion.
- Taxes this year are equivalent to about 18 percent of GDP. That’s a full percentage point higher than the postwar average. And it is rising to cover even higher spending.
- For five years labor productivity growth has been below 1 percent. “That is another expression of economic policy that is failing.” Business investment is very weak, contracting the past three quarters relative to the previous quarter, and at an accelerated rate. “That translates into we’re in trouble.”
- The “regulatory onslaught” from federal agencies adds costs to business operations, and even discussing more laws and greater regulations makes it very hard for businesses to plan for the future or invest, due to uncertainty.