U.S. Federal Intergenerational Debt: Rendered and Layered
It is a common trope among Austerians that the U.S. is passing on unsustainable debt to our children and grandchildren. And certainly there are some scary numbers out there, for example “$17.4 trillion!!” A very real number. But maybe it would be useful to render that number down so as to calculate real incidence of that debt and debt service within and between generations. With some real numbers and associated tools. With commentary mostly defered until (duh) Comments.
Total U.S. Public Debt (to the Penny)
http://www.treasurydirect.gov/NP/debt/current
Public Debt: $17,472,131,682,925.49 in turn the sum of:
Intragovernmental Holdings: $4,992,508,245,067.06 and
Debt Held by the Public: $12,479,623,437,858.43
Now for reasons that can be explained in Comments there is no need to actually pay down Intragovernmental Holdings and instead reasons why the various accounts that comprise it should increase in nominal terms over time, so I am just going to ignore it for the purposes of this post.
Debt Held by the Public: $12,479,623,437,858.43
Almost all of this is held in a combination of Treasury Bonds, Notes, Bills and TIPS with the major balances being in the first two categories. The respective holdings can be seen in the following graphic with specific numbers available by hovering your cursor:
http://www.treasurydirect.gov/govt/charts/principal/principal_debt.htm
Treasury Bonds (20 and 30 year Securities): $1.463 trillion
Treasury Notes (1-10 year Securities): $8.034 trillion
So right away we can see that ‘Long Term Debt’ as a percentage of ‘Total Public Debt’ is $1.463 tn/$17.472 trillion or 8.4% of total Public Debt. But of course somewhere between a half and a third of current 20 and 30 year Bonds have maturities in the next 10 years meaning that the actual amount of Public Debt due in years 11+ is commensurately less than that number. (Precise number left to the commenters). Now of course this calculation ignores two factors: 1) rollover of shorter term debt and 2) debt service. So maybe we can address the second factor first:
Average Interest on Public Debt
http://www.treasurydirect.gov/govt/rates/pd/avg/2014/2014_04.htm
Total Marketable: 2.007%
Bonds (20 and 30 years): 5.011%
Notes (1-10 years): 1.808%
Okay those are the numbers. Implications, arguments and outright demagogery under the fold and in Comments.
The most striking number to me is that if you take the Coupon Rates of all Marketable U.S. Debt, including Long Bonds that were issued with rates above 8% that the average works out to 2.007% or essentially identical to the Feds current Inflation Target. Which if it ever eventuates would seem to this observor to mean that existing debt going forward would carry an average Real Interest Rate of zero. Of course any new debt and any rollover debt would incur whatever the market rate would be, but it is fairly hard to argue that the current yield curve on existing debt represents some huge pass forward from Boomers to Millennials. (But feel free to weigh in in the Comments).
But as noted in a previous post the case gets even harder than that. Because in the course of three rounds of Federal Reserve QE huge portions of future 20 and 30 year issues have been bought up on behalf of the Feds System Open Market Account.
http://www.newyorkfed.org/markets/soma/sysopen_accholdings.html
Now while this particular web page doesn’t explicitly break out Bonds vs Notes we can see that the total is $2.2 trillion while an inspection of the T-Notes and T-Bills tabs shows that for Long Bonds with maturities from 2018 to 2027 and Coupon rates ranging from 6.127% to 9.0% that the Fed holds positions ranging from 53-70% of total outstanding (with 70% apparently being a self-imposed limit). And since the Fed rebates all ‘profits’ to the Treasury this would mean we have to discount even that average 5.011% interest rate on Bonds accordingly. All of which would drive the actual effective Debt Service on ALL Public Debt to the actual public under the Feds current inflation target.
Which pretty much translates to no forward passage of debt to our Grandchildren at all. Even if you discount to zero the value of whatever past infrastructure funded with that $17.4 trillion to future productivity.
I contend that the “debt” past on to the Grandchildren is in failed and crumbling infrastructure and lack of access to and poor quality of services.
Agreed Mike. But the argument of the Austerians is that EXISTING long term debt (which they like to pretend is the same as TOTAL debt) has ALREADY crowded out the possibility of issuing NEW debt.. But the reality is that the total amount of debt we have maturing 11+ years from now that is NOT on the Fed’s balance sheet is on the order of $300 billion, a tiny fraction of projected GDP over that period.
Which makes today the ideal time to issue about $100 billion a year of new Infrastructure 30 Year Bonds over the next 10 years which in turn would just restore our long term debt position to something like it was before three rounds of QE.
You don’t have to be a MMT guy to understand that the Fed has done a huge amount to remove past debt from the ledger. And a new series of bonds that would largely be used to hire Gen-X and Millennials and deliver THEM the start on a wholy renovated infrastructure is the opposite of ‘intergenerational warfare/theft’.
Concord and other Peterson funded organizations have spent 30+ years explaining that existing long term debt is ‘Why you can’t have nice things’. To which the response can be: ‘What long term debt?’ Because remaining Long Bonds outside the hands of the Fed and maturing 11+ years from now are on the order of $300 billion total with an average coupon rate of 5% suggesting that the total debt service load we are passing forward from that in isolation is maybe $15 billion a year or somelhing like 0.1% of current GDP.
Now of course that doesn’t include any roll-over of existing 10 year debt, which is the dog to that smallish tail. On the other hand Treasury tells us that Treasury Notes carry an average coupon rate of 1.808%. Meaning that if the economy recovers enough due to the extra infrastructure spending so that inflation gets back even to the Feds 2% target that existing 10 years will carry effective NEGATIVE interest rates.
Or so the numbers seem to show. I am waiting for other folks to weigh in here. We can afford the future because we have refinanced the past and almost entirely at the lower bound.
Well the hidden assumption of the austerians is that OF COURSE taxes couldn’t POSSIBLY be raised, so everything else MUST be cut. Which is an absurdity. That said, I’m not as dismissive of intergovernmental debt. The Social Security Trust fund in indicative of real calls upon resources in the future. The aging population does mean that under current law, more revenue in real terms will be paid out to beneficiaries. It’s the idea that this means that we have to cut benefits rather than raise taxes (to say the levels of the Reagan era) that I think is cray-cray.
JimA
the tax increase that would be needed to pay future beneficiaries the same “promised benefits” [for a longer period of time] as present beneficiaries would be about 2% of payroll, and can be reached by raising the tax one tenth of one percent (per year) at a time while wages are going up more than one full percent per year.
if that is done the Trust Fund “debt” never has to be paid at all… the balance in the Trust Fund just keeping up with the balance required as a “prudent reserve”… i.e. in normal circumstances a balance that is never paid out in actual money.
of course “we” are going to need “more resources” in future if we are going to be living longer.
the right’s answer to “living longer” is “make em work longer… even if there are no jobs, and even if they aren’t really all that well.
apparently they believe that only the rich have a right to retire when they “have enough.”
and how do the poor “have enough”? by paying a part of their pay every month into a system that pays for their needs when they are too old to work. and does it by “pay as you go” which does not have any effect on “debt” whatsoever, neither public nor private…
but please note, that if folks are going to retire they are going to use resources, whether those are financed from public or private schemes.
in other words the whole “retirement crisis” is completely phony.
and of course, the “debt crisis” overlooks the fact thet the “debt” was already “paid for.” the resources spent on whatever we bought with the “borrowed money” were used TODAY. this can have no effect on resources needed in the future. what debt is is a CLAIM on future resources… a purely legal/money claim, but in no way affecting the actual production and availability of those future resources… only who has first claim on them…. which is in fact the rich people who “lent” the money… that is, the people complaining about “the debt.”
i don’t think i am being very clear here. maybe you need to think it through for yourself.
another way to look at this: that money borrowed to create “the debt” was at worst money taken away from potential real investment in future productivity in order to pay for present needs.
but i don’t think anyone can seriously find any current potential real investment for future productivity that is going unmet because of “the debt.” all the debt represents is a kind of juggling of numbers that represent… loosely… past production and possible future “investment vs consumption” choices
in other words, nothing “real.”
if worse came to worse, default on the debt would hurt some feelings and make it harder for “us” to borrow from people who had other options for their spare money. but the people who lent the money lent NOTHING they were actually going to use otherwise, lent it know the “risks,” and won’t miss it if it doesn’t get paid back… mostly because they will still be in the business of borrowing and lending for profit, increasing their store of numbers, but having no effect whatsoever on even their “consumption” much less ours.
we’ve got a lot more to worry about from destroying our “resource base” otherwise known as “the planet.”
Webb concludes:
“Which pretty much translates to no forward passage of debt to our Grandchildren at all.”
Well that doesn’t jibe with what CBO’s Elmendorf had to say yesterday:
“Federal debt remains on an unsustainable path.”
So who’s right, Webb or the head of the CBO? My money is on the CBO.
The CBO link to Elmendorf’s comments:
http://www.cbo.gov/publication/45343?utm_source=feedblitz&utm_medium=FeedBlitzEmail&utm_content=812526&utm_campaign=0
“but please note, that if folks are going to retire they are going to use resources, whether those are financed from public or private schemes.”
Yep. Rather than concentrating in intergenerational debt, I wonder what it would look like if we looked at the trust funds as a net implicit loans from the middle class to the wealthy. Since the trust funds were created from payroll taxes. The wealthy effectively got tax cuts. Since payroll taxes higher than needed to pay contemporary benefits enabled income taxes to be lessoned without raising debt held by the public as much. If you look at it that way, it’s the same old story of lending the profligate money and having them angry and reluctant to repay the money, only it is the wealthy who are truculantly insisting that the repayment terms are somehow unfair, and that income taxes can only go down and not up.
Krasting, Elmendorf like most CBO Directors before him is a tried and true Austerian and Debt Crisismonger and one I might say that has shown that he has an overt agenda that goes beyond giving a straight down the middle assessment of legislation and policy.
I consider him a biased partisan and give his statements no independent credit at all.
Maybe you could lodge an objection to my argument based on numbers and not on appeals to authority.
Jim A
i’d have more sympathy with your argument if i did not know that SS pays for itself. and the money “lent” to the government is being repaid, on time, accomplishing exactly the purposes for which it was lent and borrowed.
re-look: actually i could agree with you even more. you do describe what is happening. but aside from the bitching and moaning and lying by the bad guys about repaying the SS debt (which they always imply is a debt OF SS when it is a debt TO SS).. aside from that, the money that was lent by SS isn’t any different from any other money lent to the government… it keeps present taxes a bit lower… and makes future taxes (when we can afford the better?) a bit higher than they would otherwise have to be (a very big caveat).
it is all really a perfectly normal matter of borrowing and lending… something businesses do all the time. but the same business people scream when “the government” does it…. because … well, because there is always the potential of the government borrowing too much, for bad reasons…
and who among us does not think the government spends too much for bad reasons.
the hard problem is prying their cold dead minds from debt hysteria to “i don’t like what the government is doing with the money.”
and then you’d have to try to explain to them that what the government did with the money was not “pay for Social Security.” SS paid for itself. it lent money TO the government.
The government used the money to run a couple of wars and bail out the banks and… and all that good stuff that might or might not be necessary.
Kraasting
your faith in Elmendorf is touching.
Like most people who have no confidence in their own ability to figure things out, you are ready to trust your soul and your testicles to the nice man in the suit who says “Trust me, I am an Expert. I’ll take good care of this for you.”
Webb and Coberly – I’ll pass along your thoughts to Doug next time I see him.
And as for ‘authority’ on this topic I hope your not considering yourself to be one. So If you’re not, Elemendorf is not, just who is – in your opinion? Dean Baker perhaps? Krugman maybe? Please give me a name.
Jim A. There is a solid case that the 1983 FICA increases were a combination of too small overall and somewhat front loaded or rather middle loaded.
That is it took until 1992 for Trust Fund balances to build to the minimum reserve point required under current law, to that degree Reagan actually left the system UNDERfunded in his last year though on track to be FULLY funded at the end of the ten year window that the 1983 legislation focused on. However the side effect of that was that the Trust Fund from 1996 to 2005 grew at a faster rate than needed to maintain that minimum level and indeed is on pace to quadruple it before fairly rapidly crashing back to that minimum by the end of the 2020s and then to a zero balance by 2034.
This in retrospect, and to a degree in prospect, could have been avoided by a more complex set of FICA adjustments that would have avoided the whole boom and bust thing, but in 1983 all the pressure was on to achieve a 10 year deal that would push this all past the 1988 election and also address the 75 year gap “on average”.
But given that by the technical measure of solvency, that of “ten year actuarial balance”, that Social Security was in fact insolvent every year of Reagan’s Presidency (though on a 10 year glide path to solvency), any talk of “forced loans” from the middle class to anyone is a drastic oversimplification of the very complex legal, political and even accounting deal struck in 1983.
Now there is a solid argument that Bush II was being totally disingenuous when he used what everyone who was actually paying attention understood was a temporary huge bulge in Trust Fund Balances to justify his tax cuts, the official projections then as now showed the Trust Funds rapidly declining in the late 2020s and if anything needed a scheduled infusion of funds. And since I am a Bush Basher of long standing I will be happy to join in the condemnation. But unfortunately, and even though I am equally down on former President Ronnie Raygun the historical record shows that .he did the right thing by Social Security, albeit forced into the deal against his will.
Krasting my authority is the fact that I use official numbers from Treasury and Social Security and then do honest mathematics on them. Unlike you I don’t just manufacture my own number series.
As to my own authority, well I have been blogging about Social Security financials for a long time, basing much of my work on direct inspection of the Tables but also openly and admittedly drawing some points of analysis from people like Dean Baker, Henry Aaron, and Paul Van de Water. Moreover I correspond with Dean, Henry and Paul and trust me they don’t hesitate a second in correcting me, or attempting to, because I don’t always defer to everything. But on the whole they encourage my work and where necessary second it to some other people in the Social Security policy world.
Am I an ‘Authority” with a capital ‘A’. Well most people would probably say not, after all I have no fancy title or job or traditional academic credentials in the field. On the other hand a lot of people who do have those big names and big titles and influential media slots do listen to me, just not in this forum.
As I final irony your name happened to come up in the forum that I participate in on this topic with someone asking “Who is this Bruce Krasting guy?” Which question I answered to the best of my ability whereupon just about everyone proceeded to ignore whatever post of yours had sparked the inquiry. Because I have built up some measure of small ‘a’ authority on this topic among the people who matter on the liberal side of the Social Security debate.
Krasting
I don’t claim to be an authority on anything. I do suggest that people not rely on “authority.”
Except when I comment ex-cathedra on the Social Security “crisis,” I don’t even claim to know what I am talking about. I hope that anyone who cares… which should be everyone… can check my work without relying on my… or anyone’s… “authority.”
Since all I say is that “by using the same numbers from the Trustees Report that the Liars use to claim “crisis,” I can show, and you can show yourself.. that the X Trillion Dollar Unfunded Deficit!” amounts to a need for people to raise their own contribution to their own retirement savings (known as Social Security) by one tenth of one percent per year… or about 80 cents per week per year in today’s terms, while wages are going up about 8 dollars per week per year, in today’s terms. Ultimately workers will have about twice as much in real dollars after paying for their Social Security as they have today. And their Social Security will be worth about twice as much in real dollars is it is today… funding a longer, richer retirement.
Your Experts… Krasting’s… are trying to fast talk you into panicking and turning over your life savings to them… that is “privatizing Social Security” or making other changes that will force you to rely on private investments, managed by them, because Social Security will not be enough… will be at best a kind of welfare program, means tested and ugly, and you won’t be able to retire until they let you.
No need to take my word for it. Start with the same Trustees Report I did. Do the math. Of course you need to do it correctly… which means you need to know what you are doing… which may be difficult in some cases.
Bruce and I disagree somewhat in the way we describe the growing Trust Fund after Reagan.
Bruce is right that the Trust Fund has not been stolen… not even by Reagan, but I like to point out that the growing Trust Fund money was in fact borrowed and the money was used, in part, and for part of, the Reagan Arms buildup.
Bruce doesn’t like to put it this way because it sounds too much to him like Reagan stole the money. I like to put it this way because I like to remind Republicans mostly that they have had the use of the money and they really ought to expect to pay it back.
Then, as Bruce was the first to notice, IF we do the sensible thing and raise the payroll tax one tenth of one percent per year to pay for the growing needs of retirees, it turns out that we never have to actually pay back the money borrowed from the Trust Fund: The amount just sits there in the bank in the form of “notes”… not real cash collected from taxpayers… which act as a “reserve.”
For some reason people don’t seem to understand this. The LIars use the misunderstanding to foment hate and despair. But if you think it through carefully… asking for a lot, I know… you will see that it is actually good news. very good news indeed. That’s why they don’t want you to think carefully.
Krasting
I can’t help rubbing it in:
I say pejoratively that you are willing to trust your soul to the man who claims to be an Expert.
You reply by asking me if I am claiming to be an expert.
You cannot, apparently, even think clearly enough to understand that “don’t trust experts” is not the same as “trust me I am an expert.”
but don’t worry, not being able to think clearly is pretty much the way important things are decided in Washington.
Coberly is quite correct in that the plan is toward “privatization”(stealing) of Social Security Trust Fund, keeping the TAX, and running Paygo into the ground.
Mike while the Trust around is stuffed with real assets they are in a form that cannot be stolen. Instead privatization depends on hijacking future flows of funds from FICA via ‘carve outs’ which in turn will starve SocSec in ways that will require stark benefits cute via means testing and price indexing that in rapid order will kill support of SocSec among the middle class.
But the privatizes missed their reap opportunity in the 90s when SS was building positive cash flows that ultimately exceeded more than $100 billion a year. But which flows plateaued by around 2004 and removed most of the straight financial incentive from privatizers. Which is why you don’t hear much about it from Wall Street types with remaining efforts concentrated among the Cato and Peterson folk who hate Social Security in and of itself.
Because the moment for really taking Social Security for a cool Trillion dollars of cash flow was more than a decade ago and the window has mostly closed. That is the Greedheads are mostly muted while the Haters are still in Full Cry. Not that there wouldn’t be money to be made, just nothing like the flows that were possible in privatization had started back with the Clintonistas in 1998. Basically Soc Sec dodged a bullet.
But to repeat you can’t steal Trust Fund Assets. You can only find ways of not honoring them and so save money that way. But that just minimizes flows out from the R>G crowd and doesn’t generate flows in.
Webb – I do respect your knowledge on matters related to SS, but this topic is far afield of SS.
But I am thankful to you for your comments re privatization. You are correct. There is no privatization threat to SS any longer. The fact that SS is running cash deficits (and will for the next 75 years) means there is nothing to privatize any longer.
I do hope that Coberly and Meyer read your words on this topic. The next time either of them raise the privatization flag I will point them to the expert opinion of Webb.
Privatization is a dead concept. Those who worry about it are ill informed. Those who write about it in the context of 2014 are just blowing smoke at the readers.
Krasting
Meyer does not speak for me. I have frequently said that if the Trust Fund were stolen by a flying saucer today it would make no material difference to Social Security.
The privatizers are after much bigger game than the Trust Fund.
Krasting says
that Bruce says there is no privatization threat to SS. Bruce did not say that. He said there was no threat of stealing the Trust Fund. He did say that “the privatizers” want to hijack the future flow of funds.
Krasting can’t even get it straight when the words are right in front of him.
as for “SS is running cash deficits…” Krasting appears not to know what this means, or hopes that readers won’t. The “cash deficits” mean that we have reached a long planned for point where instead of raising the payroll tax immediately, we are drawing down the savings created by raising the payroll tax in 1983 exactly so that the unusually large boomer generation would prepay it’s own retirement… at least to the extent that their greater cost would exceed the “normal” pay as you go financing.
It is very unusual, not to say dishonest, to scream “bankruptcy” when the person in question draws from his “christmas fund” to pay for the things he created the christmas fund to pay for.
Frankly I don’t think Krasting understands this stuff, but the people telling the Big Lie know exactly what they are saying to mislead the people.
So, three facts:
SS cannot run cash deficits. It can only spend the money it takes in or has taken in.
Even if nothing is done, SS can continue to pay benefits larger in real value than benefits are today.
If the workers are intelligent… and honestly informed… they will raise their own payroll tax one tenth of one percent per year, increasing their future benefits enough to cover their longer life expectancy and the HIGHER monthly payments needed to keep up with generally rising standards of living. This increase will, quite coincidentally, eliminate the need to repay the Trust Fund money that congress borrowed from it.
Mike Meyer
You seem to have got me a bit wrong. My fault probably, and not important except when someone like Krasting uses it to put words in my mouth.
It is not the Trust Fund they are trying to steal, but Social Security itself. They want the fees they can earn by “managing” your money… which would amount to about half of what you would otherwise earn. And they don’t care if that means you can’t retire. In fact they like the idea because the longer you work the more money you make for them.
What helps confuse the issue is that Congress would like to steal the Trust Fund. Not because they see it that way. They are stupid, and completely lacking in any moral sense. They see the Trust Fund as money they will have to pay back. But they don’t hear the “back” part, so they see the Trust Fund as money they have to pay. And they look for ways not to have to pay it. And they tell the story to themselves so it looks to them like simple “fiscal responsibility.” Stealing from widows and orphans has always looked like fiscal responsibility to these kind of people.
But what makes the whole thing doubly sinsister is that not one of them, and not the “liberal opposition” wants you to know that you can avoid the whole “crisis” in Social Security simply by paying for what you will need… by raising your own “tax” a few pennies per week for a few years.
That fact should take the “crisis” right off the books: SS has no effect on the budget or “the debt.” None whatsoever, in spite of the amazing twisting of words by which “paying what we owe” becomes “increasing the deficit.”
The question is why the Liars have been pretending that SS increases the debt for years, now the “left” wants to “fix” SS by changing it so it increases the debt?
I think it’s mostly stupidity. But there is always a chance that the left is playing a double game. Either they work for Peterson, or they just hope to ride into power on a “social welfare” platform. If it’s the last, it won’t work. And the Petersons would be gladder than hell to see them try it.
apologies to Bruce Webb
i do not mean to hijack your thread. What you are saying is important and I hope you keep saying it until everyone… even me…. understands it.
But it is hard to separate “the debt” from the attack on Social Security.
Coberly, et.al.: I disagree. I DO believe the TF is the target. The QE bailout shows exactly how it will be done. Convert those TF T-Bills to cash for reinvestment into Wall street. There’s ALWAYS more than one way to skin a cat.
Mike
I don’t understand your point.
Coberly: In the original congressional discussions for SS in the 1930’s the concept was that if any funds past paygo were to be invested in Wallstreet than the fear was that SS could manipulate Wallstreet as those funds were projected to be vast. THAT’S why T-Bills were used to just lend those monies to Treasury. But the original concept was to invest in Wallstreet thus growing a TF through investment. That idea has never died. IRA’s and 401K’s are the rebirth of that idea from the 1930’s and the trillions in the present TF are the next natural step.
Mike
i am still not sure i understand your point. I don’t think where the TF is invested is very important to SS. A better return would help the payroll taxpayer a bit, but times of low return would hurt or at least confuse the taxpayer more than the “bit” would help. I like the idea of keeping SS entirely in the hands of the worker-beneficiaries and would support a constitutional amendment to take it out of the hands of Congress who have shown over the years that they are too dumb to understand it, and not to be trusted with it.
as for the greedy financial services companies getting their hands on it… i don’t think the TF is a big enough account to be a great prize for them. The prize they are looking at is managing the workers pension plans in the absence of SS or if SS is converted to some kind of defined contribution plan.
i also think… quite soberly… that the Petersons et al really like to hurt people. They may not see themselves that way, but in their less garded moments they sound to me exactly like classical sadists… they want to teach the workers “discipline” and “responsibility” and i more than a little suspect that’s the way they were raised themselves.
nothing wrong with a little discipline and responsibility of course, but when you see that the guy advocating it has got his heel on the neck of the person he is teaching responsibility to, you begin to suspect he is getting some other kick out of it.