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CHAPTER 1
Unprecedented Burden
Over the course of its history, the United States has had periods in which the federal government has held massive amounts of debt for a relatively short time. There have also been periods in which the government has run manageable deficits for an extended period of time. As they come of age, millennials are inheriting a fiscal situation unlike the one encountered by any previous generation: massive, historically high debt levels, persisting for as far as the eye can see. This is true no matter which way one wants to measure the debt.
Figure 1.1 charts the growth in publicly sold debt as a percentage of the economy ever since George Washington's first term in 1790 and projects it out all the way to 2049, based on data and estimates from the Congressional Budget Office. The long-term trend, up until now, has been that it has spiked during moments of war and economic distress, and then retreated. But what's happening now is markedly different in terms of the magnitude, duration, and circumstances.
In the midst of strong economic growth and relative peace, the debt that has been inherited by millennials as a share of the economy is significantly higher than in the aftermath of the Revolutionary War. This was the debt that arguably gave birth to the United States as we know it, as it was one of the factors that forced the nation's founders to abandon the Articles of Confederation in favor of the U.S. Constitution. Figuring out a way to pay the debt became a central part of the legacy of Alexander Hamilton (a plan that has gained modern notoriety for fans of a certain Broadway musical).
The debt being absorbed by millennials also exceeds that which was accumulated during the Civil War, World War I, and the Great Depression. As a result of World War II, there was a massive spike in federal debt in the 1940s as the United States, a late entrant into the war, made up for lost time by energetically ramping up military production. But after the war came to an end within a few years, the debt steadily fell. Unlike the aftermath of World War II, however, the current debt burden won't soon start to retreat.
In 2007, just before the Great Recession and onslaught of baby boomer retirements, public debt was 35 percent of gross domestic product (GDP). It doubled within five years and its upward trajectory has not changed. In the coming decades, it is projected to blow past the highs of the 1940s, reaching unprecedented territory. By the end of the projection period, in 2049, it's supposed to be 144 percent of GDP. Again, what's remarkable is that while previous extraordinary spikes in the debt have come during war and economic turmoil, the current surge in debt is continuing during a time of relative peace and prosperity.
Viewed in dollar terms, as shown in Figure 1.2, the acceleration of public debt from the time the baby boomers entered the workforce to what's projected in the coming decades as millennials take over the workforce is mind-bending. By 2049, debt is projected to be nearly $100 trillion. Furthermore, by some measures, this actually understates the magnitude of the debt. The CBO data only consider public debt, which does not take into account the government's internal obligations, such as the money exchanged between the U.S. Treasury and the Social Security system. CBO economists argue that the obligations government agencies have to each other are less significant when considering the debt burden, and so instead they focus on the value of all the bonds being issued on publicly traded markets. But others argue that the total debt — or gross debt — provides a truer measure of the nation's overall liabilities.
Looking at Figure 1.3, we can see the total federal debt as a percentage of gross domestic product since 1940. Total debt levels breached an extraordinary 100 percent of gross domestic product while America was fighting World War II. In theory, when debt exceeds 100 percent of GDP, this means that if the value of all the goods and services produced in a country over a given year were exclusively used to pay down the debt, it still wouldn't get rid of all of it. In practice, this obviously won't happen as governments, businesses, and individuals need to buy lots of stuff in the meantime. So the nation's policymakers have typically worked toward limiting debt to a sustainable amount. That way, people can continue to live their lives and institutions can make investments, while taxpayers, via government, make reasonable interest payments.
After World War II, as spending returned to more normal levels and the economy took off, the level of debt dwindled. By the time the first baby boomers reached high school graduation age, in 1964, it was cut down to less than half of its wartime peak. By 1974, as early baby boomers were in their 20s and starting to form families, it had fallen to 32.6 percent. In other words, as they entered the workforce, boomers only faced a relatively modest federal debt.
In the following decades, as baby boomers gained political influence and eventually power, they reversed this trend. On one side, Democrats promoted continued growth in the social welfare state. On the other side, Republicans, despite rhetoric about shrinking government, let the cost of the welfare state continue to balloon while pushing through large tax cuts and increasing military spending. This lust for instant gratification took its toll. Instead of leaving the country in the same state as they inherited it, boomers are leaving a nation in financial shambles, with no easy fixes. Despite knowing for decades that a demographic time bomb would get detonated starting in 2011 when the boomers began to retire, they made sure that nothing was done to reform retirement programs in a way that would have reduced the burden on future generations.
These two factors — mismanagement of the regular budget and failure to do anything about the inevitable long-term problem — saw the debt steadily grow for decades, and then explode in the years following 2008 as the Great Recession coincided with the first wave of retiring baby boomers.
In 2007, total debt as a share of GDP had grown to 62.6 percent. That was historically elevated, but still within the realm of manageable. But by 2012, it had reached 100 percent for the first time since World War II, and has never looked back.
When the early baby boomers were in their working years, total debt averaged 50 percent of GDP. By comparison, since the first millennials turned 18, debt has averaged nearly 80 percent of GDP and has exceeded 100 percent of GDP for seven straight years for the first time in history.
Another way of comparing the debt burden inherited by millennials to the experience of the baby boomers is to try to break the numbers down to the individual level. In Figure 1.4, I've charted the growth in individual median income over time for 25 to 34 year olds against the total federal debt per person since 1974, when the earliest boomers were in their late 20s. At that time, median income was $7,880, whereas the per capita debt was $2,221. That ratio has reversed.
Even though by 2017, median income among 25 to 34 year olds had grown to $35,455, debt grew much more rapidly, climbing to $62,263 per person. That means that between 1974 and 2017, young Americans' share of the federal debt increased 28 times while their incomes only increased 4.5 times.
This contrast can be seen in Figure 1.5.
Although many would like to blame tax cuts for the accumulation of debt, that isn't supported by the data. To be clear, there is no doubt that if the government were collecting more tax revenue, deficits would be narrower and the debt would not be growing as rapidly. That having been said, it is undeniable from the data that even after the most recent Republican tax cuts signed into law by President Trump in 2017, federal revenues are projected to be above historical levels in the coming decades. In contrast, spending is way out of whack with historical averages, and that's primarily due to growth in Medicare and Social Security, combined with the accompanying spike in interest payments. As CBO puts it, in its projections, "large budget deficits would arise because spending would grow steadily under current law, and revenues would not keep pace with that spending growth." In other words, the story of the growing debt is one of taxes not rising fast enough to keep pace with dramatically higher spending, rather than of dramatically lower taxes making modest spending suddenly unaffordable.
As shown in Figure 1.6, tax revenues are currently slightly below the 50-year average of 17.4 percent of GDP, but they are expected to exceed that average by the middle of the coming decade and reach 19.5 percent of GDP by 2049. Thus, if spending were kept in line with the historical average over the past 50 years of 20.3 percent, we'd be looking at nearly a balanced budget in 2049 and there wouldn't be much of a debt problem to worry about. Instead, spending will soar to an astounding 28.2 percent of GDP, substantially above the historical average, resulting in a massive gap that year.
It's also a popular line of argument in some quarters to attribute our debt problem to wasteful military spending. How many times have you heard somebody argue that, if only the Pentagon weren't squandering money, we'd easily be able to support a more generous social safety net? Although no doubt there is waste in the large defense budget, in reality it's social safety net spending — mostly on retirees — that's crowding out defense spending rather than military waste that has forced cuts to social welfare programs.
Figure 1.7 puts core defense spending as a share of GDP up against combined spending on Social Security and Medicare starting in 1969 and projected out to 2029. What it shows is a steady decline in defense spending over the decades, but for the ramp up in the wake of the September 11 attacks. In contrast, spending on Social Security and Medicare has continued to eat up a larger and larger share of our economic output, a trend that accelerated after boomers reached Medicare eligibility age in 2011.
The increases in underlying spending and the resulting debt payments are also expected to substantially increase the amount of the budget that will have to be taken up by interest payments, which don't actually provide any benefits. As shown in Figure 1.8, about 9 percent of overall spending is expected to go to interest payments in 2019. By 2049, that will rise to 20 percent, according to CBO projections. That means that one-fifth of the budget would be eaten up by creditors before the federal government paid for a single good or service.
The clear driver of the massive expansion in debt is retirement programs to fund the baby boomers. As the CBO explained the debt problem:
In particular, over the next 30 years, spending as a share of GDP would increase for Social Security, the major health care programs (primarily Medicare), and interest on the government's debt. In CBO's projections, most of the spending growth for Social Security and Medicare results from the aging of the population: As members of the baby-boom generation (people born between 1946 and 1964) age and as life expectancy continues to rise, the percentage of the population age 65 or older will grow sharply, boosting the number of beneficiaries of those programs. Growth in spending on Medicare and the other major health care programs is also driven by rising health care costs per person.
The burden of the nation's retirement programs on the millennial working-age population is significantly higher than it was when baby boomers were in their main working years. In 1968, when the earliest boomers would have been at college graduation age, Medicare was in its infancy, having been passed into law just three years earlier. At the time, as shown in Figures 1.9 and 1.10, the two major retirement programs, Social Security and Medicare, accounted for 15.8 percent of the federal budget. In 2018, the share had soared to 40 percent.
Unlike the World War II spike, however, the current debt isn't the result of a single major event that's going to end in a few years and allow the nation to return to fiscal normalcy. Baby boomers started retiring in 2011, will continue retiring into the 2030s, and will still be collecting benefits for decades after that.
There has been a long-standing debate in American politics about the merits and drawbacks of redistributing wealth from the rich to the poor. But the reality is that America does not redistribute wealth from the rich to the poor as much as it redistributes wealth from the young to the old.
One of the major defenses of baby boomers is rooted in the idea that they simply are "taking out what they put into the system." But this idea rests on two popular myths about the way retirement programs operate.
The first popular myth is that people pay payroll taxes while they are working, and then that money is put into some sort of government account, saved until their retirement, and then used to pay their retirement benefits. In reality, the payroll taxes of current workers are being used to cover the benefits of those who are currently retired. Thus, millennials will be paying for baby boomers' retirement benefits for the rest of their working lives.
The second myth is that younger generations are simply "paying it forward," just as older generations did for retirees when they were young. In this formulation, baby boomers may not literally be withdrawing from some sort of government savings account they've been putting money into all these years, but they are at least just taking out what they put in to fund the system when they were working and paying payroll taxes. This is also a misconception. In most cases, baby boomers will be collecting a lot more in benefits than they paid in taxes.
The liberal Urban Institute has a report that looks at the expected lifetime value of Social Security and Medicare taxes and benefits for baby boomers who reached 65 in 2015. In Table 1.1, I've listed the estimates for a range of income levels and household characteristics. Just to look at some examples, a single man at the mid-income level of $51,300 would have paid $351,000 in taxes over his working life, but stands to collect $493,000 in lifetime Medicare and Social Security benefits. A married single-earner couple with income of $82,100 would have paid about $556,000, but can expect to extract nearly double that — $1,093,000.
Only at the highest income levels subject to Social Security payroll tax does the ratio change. For instance, a single man with earnings of $127,200 would have paid $790,000 in taxes and collected $671,000 in benefits.
The demographic reality is that when baby boomers were the bulk of the workforce, they not only had a larger working-age population with whom to share the burden of caring for retirees, but they simultaneously had fewer retirees for whom to care.
Looking at Figures 1.11A and b, we can see how the size of the working-age population has compared with the over 65 population, and how that is expected to change over time. In 1970, when the earlier baby boomers were working but younger ones were still children, those aged 18 to 64 made up 55.9 percent of the total U.S. population, compared with 9.8 percent who were 65 or over. In 2010, the year before the first baby boomers reached retirement age, the working-age population had peaked at just a hair under 62 percent, as the 65 and over population swelled to 15.2 percent. Over time, as the working-age population retreats with baby boomers retiring from the workforce, the number of those over 65 is expected to increase significantly further. By 2030, more than one-in-five Americans will be over 65, and the working-age population will have dipped below 60 percent.
This change is expected to contribute to the strain on the Social Security system, which is projected to see a steady decline in the number of workers supporting every beneficiary. As shown in Figure 1.12, in 2000, when boomers were still in the workforce, there were 3.4 workers per beneficiary. By 2035, under the mid-range estimates of the program's trustees, there will be just 2.3.
The explosion in the retirement aged population is a result not merely of more baby boomers reaching retirement age each year, but also of retirees living longer. When considering this issue, it's preferable to look at life expectancy after 65 as opposed to life expectancy at birth. The average age of life expectancy at birth is driven down by those who die young from causes such as illness, accidents, or violence. It therefore doesn't tell us what we want to know, which is how long the typical person is expected to be collecting retirement benefits. From Figure 1.13, we see that for both sexes, the life expectancy at 65 went from 15.2 years in 1970 to 19.4 years in 2017. Although four years may not seem like a lot, multiplied by 52.7 million (and growing) Social Security beneficiaries and nearly 60 million (and growing) Medicare beneficiaries, it represents a massive amount of money.
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Excerpted from "Fear Your Future"
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Copyright © 2019 Philip Klein.
Excerpted by permission of Templeton Press.
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