by Brett Stevens on October 21, 2019

In the theory of modern society, a “social contract” exists between government and citizens, whereby government protects the citizens and citizens pay taxes to government. Critical thinking offers a different look: government offers pleasant notions that citizens pay taxes to support.

For example, we had the New Deal and Great Society programs, both of which promised to end poverty. They spent trillions of dollars and achieved nothing, while Walmart and Sears delivered low-cost products that enabled the impoverished to live better lives.

Since society is based on appearance, only appearance sells, which means that real problems get systematically disregarded while society pursues symbolic — emotional, ideological — goals in their place. One example would be the rotting infrastructure of America and the hidden cost it presents:

The federal government also has debt that has not been accounted for, and which one doesn’t often hear about. The debt that has been accounted for is the $15.6 trillion held by the public in the form of US Treasury bonds. The debts that have not been accounted for include the deferred costs of maintenance on roads, water systems, and 54,560 structurally deficient bridges, as well as the yet-to-be-built low-carbon energy systems necessary to mitigate the catastrophic effects of climate change. And these are just two broad examples. So, just how much hidden US debt is there? At this point, we must rely on rough estimates. For example, according to a 2016 report from the American Society of Civil Engineers (ASCE), upgrading the country’s crumbling infrastructure would cost $5.2 trillion.

There is also $3.5 trillion or so in unfunded pensions:

As of fiscal year 2015, the latest year for which complete accounts are available for all cities and states, governments reported unfunded liabilities of $1.378 trillion under recently implemented governmental accounting standards. However, we calculate using market valuation techniques that the true unfunded liability owed to workers based on their current service and salaries is $3.846 trillion. These calculations reflect the fact that accrued pension promises are a form of government debt with strong rights. These unfunded liabilities represent an increase of $434 billion over 2014, as realized asset returns fell far short of their targets.

The we have to look at the $40 funding gap for Medicare and Social Security to run for the next 75 years:

As Social Security provides benefits to millions of retiring baby boomers, its costs will balloon to $1.4 trillion. That includes a rapidly increasing number of Social Security disability recipients. Their scheduled benefits will increase by more than $60 billion in the next decade. In Social Security’s early years, the ratio of workers to retired beneficiaries was high—16 to 1. And, on average, individuals died about three years before they were due to collect benefits. Thus, tax revenue generally exceeded benefit payments. By 2035, the ratio of workers to retired beneficiaries is projected to drop to 2-to-1. During this decade and the next, the number of Americans 65 or over will jump by 75%, while those of working age will nudge up by just 7%. During the next 17 years, 77 million workers will retire—that’s 10,000 people a day. Thirty-six million Americans are already retired. The cost to make these programs financially solvent for the next 75 years is almost $40 trillion.

This adds up to a grand total that spells out “default” because it dwarfs our ability to pay it:

Total potential debt for the U.S. by one all-encompassing measure is running close to 2,000% of GDP, according to an analysis that suggests danger but also cautions against reading too much into the level. AB Bernstein pulls in debt from a variety of sources and compares it to GDP as follows: 100% of GDP using federal, state and local government debt combined.

150% for households and firms

450% for financial debt, which carries “conceptual issues and risks,” namely that debt held by financial firms often represents potential in a worst-case scenario involving various derivative instruments that can carry high notional levels that are unlikely ever to be realized.

27% in trusts for social insurance programs.

484%, which values all the promises from current social insurance programs.

633%, which tallies up an “infinite horizon” of obligations for social programs, rather than just the traditional 75 years used in computations.

The leaders in this race will be the trust funds we employ to fund entitlements programs, which are rapidly going bankrupt:

Three trust funds are expected to be depleted within the next 15 years: Social Security’s Old-Age and Survivors Insurance Trust Fund, Medicare’s Hospital Insurance Trust Fund, and the Highway Trust Fund. By 2009, the total balance of the Social Security trust funds was $2.5 trillion. In 2010, Social Security began running a cash deficit, as its expenses exceeded its income (excluding interest). The Trustees project that in 2020, its expenses will exceed total income (including interest). At that point, the Trustees will be have to begin redeeming the funds’ special non-marketable Treasury securities. In 2035, unless reforms are enacted, the Social Security trust funds as a whole are projected to be fully exhausted, as they will have redeemed all of their Treasury securities. At that point, Social Security’s receipts will only be sufficient to cover 80 percent of scheduled payments. Unless reforms are enacted, Medicare’s HI Trust Fund is expected to be exhausted in 2026, which would precipitate an 11 percent cut in its payments to hospitals and other providers. Unless significant changes are made, both the Mass Transit Account and the Highway Account will be depleted in 2022.

In addition to these, we have the national debt and the state and local debt (which overlaps with the pension debt discussed above). On top of that, personal and corporate debt.

Other obligations await us. We have not developed new technologies in some time, and the internet has now settled into a thin margin market, so for another wealth boom, we need to produce something new that is widely needed and can be afforded worldwide.

This means that it is not only unlikely that we will address our infrastructure crisis, but that we will be pirating further money that is needed to fund infrastructure in order to address the entitlements costs of 75 years ago.

Tags: debt, deficit, infrastructure, pensions, underfunded

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