Understanding the Budget Deficits

By James Kwak

Today’s Atlantic column is a follow-up to last week’s on the size-of-government fallacy. In the column, I break down the projected 2021 deficit into three components: Social Security, Medicare, and Everything Else. (It’s important to use 2021, or some year out there, because most of the current spike in deficits will go away as the economy recovers.) I wanted to explain here how I came up with the numbers and talk a bit more about this approach.

The Social Security budget is simple: it’s 2021 outlays (mainly benefit payments) minus 2021 receipts (payroll tax); interest on the trust fund doesn’t come into play since that’s an intra-governmental transfer. Payroll taxes of 4.5 percent of GDP are from the January Budget and Economic Outlook (BEO), Table 4-5; outlays of 5.3 percent of GDP are from the June Long-Term Budget Outlook (LTBO), Table 1-2 (it’s the same in both scenarios).You get a deficit of 0.8 percent of GDP.

Medicare is more complicated, since Medicare was never designed to be fully self-funding. Medicare Part A (hospital insurance) is supposed to be self-funding like Social Security, but Part B (supplemental medical) was always funded partly by beneficiary premiums and partly by funds from general revenues. Part D (prescription drugs) is also funded like Part B.

Gross Medicare spending in 2021 is easy: that’s 4.3 percent of GDP, from the LTBO, Table 1-2, alternative fiscal scenario (the more realistic one). Medicare gets another 1.1 percent of GDP in offsetting receipts. That’s from the 2011 Medicare trust funds report, Tables V.E4 and V.E5.* I took all Medicare receipts and subtracted out the payroll tax and the contributions from general revenues; most of what’s left is beneficiary premiums. So if you think of Medicare like a health insurance plan, it collects 1.1 percent of GDP in premiums and pays 4.3 percent in benefits, for net spending of 3.2 percent. The Part A payroll tax brings in 1.4 percent of GDP (BEO, Table 4-5), leaving a deficit of 1.8 percent of GDP. Under current law, that deficit is filled by general revenues.

If you subtract Social Security and Medicare from the total 2021 budget, you get Everything Else, which has receipts of 12.5 percent of GDP and primary outlays (not counting interest on the debt) of 13.0 percent, for a primary deficit of only 0.5 percent. And that assumes that all of the Bush/Obama tax cuts are made permanent (except for the two percentage-point cut in the payroll tax).

So as far as 2021 is concerned, the solution seems pretty simple. Let the tax cuts expire at the end of 2021. Assuming that we do patch the AMT, killing the tax cuts is worth $444 billion in 2021, or 1.9 percent of GDP. That would cover almost two-thirds of the total deficit.

But while many Democrats support using more general revenues to fill the Medicare deficit, I’m not sure that’s the best solution. I lean toward the position that Medicare should be self-funding, because it’s basically an insurance product you’re buying from the federal government: you pay with payroll taxes and premiums, and you get health insurance coverage in return (or at least that’s the way it should be). One reason people don’t like taxes is that they can’t see what they’re getting in return. With Social Security, people can see exactly what they’re getting for their payroll taxes, and as a result they strongly prefer raising payroll taxes to cutting benefits (Times poll, question 43). They also feel the same way about Medicare (question 39), perhaps because people think that Medicare is fully funded by payroll taxes.

If Medicare were fully self-funding, I think this would help clarify the relationship between taxes and benefits, and people would be more willing to pay the taxes necessary to get their benefits. As I said in the Atlantic column, how much you’re willing to pay for Social Security comes down to how much insurance you need, and that’s a question you answer differently from the abstract question of how much government you need. If the same were true of Medicare, it would be obvious that as health care costs rise in general, the amount we pay for Medicare should rise at the same rate. As it is, it’s hard to explain why general tax revenues have to go up constantly because of health care inflation. On the other hand, it’s possible that making government finances more transparent will just make people want to pay taxes even less, so I could be wrong.

The other issue is that payroll taxes are regressive, which is the big reason why most Democrats want to raise income taxes on the rich and use the revenue to bolster Social Security and Medicare. This is true, but it’s also important to remember that Social Security and Medicare are net progressive programs (especially Medicare, where everyone gets the same benefits). If you raise payroll taxes, you could use the additional revenue to make the income tax system more progressive at the low-to-middle end (larger EITC, larger standard exemptions).

* Actually, the detailed projections only go out to 2020. So I took 2020 values and divided them by 2020 GDP.

 

34 responses to “Understanding the Budget Deficits

  1. However, my records show direct payment by withholding for Parts A/B each month.

    For those on Social Security & Medicare (only-not Medicaid and/or private Medi-gap), we also must pay deductibles on each part [A/B/D] & co-pays on Part D where the deductible, monthly premiums & Rx co-pays rise even when SS benefits are frozen.

    In 2010, pay out $112.10/month for a total of $1345 this year before paying the deductibles & procedure/Rx co-pays.

    Considering that Medicare doesn’t cover dental & vision care which are very necessary for health, it easily becomes hard, if not impossible to pay for food, Rx meds, personal & household needs.

    Until Medicare & Medicaid are merged & the wage/salary cap is removed from F.I.C.A., all three are in trouble. We also need to make sure more income streams fall under regular income rates.

  2. urban legend

    Medicare cannot be fully self-funded. It covers (and must cover) everyone, regardless of work experience.

    Nyer 11: Social Security is not “in trouble.” It may be insufficient some 30 years into the future, but it may well be (and likely will be based on actual experience over the past 20 years) sufficient if current projections for such a long period turn out to be too pessimistic. It is something we should watch, and that’s what the Trustees do. When there’s real trouble, they will go further in the hair-on-fire mode than a pro forma statement that the system “should” be brought into official actuarial balance “soon.” We should be doing nothing more right now than watching. Cutting anyone’s benefits in the future or demanding higher payroll taxes from anyone, wealthy or not, based on what can only be called speculative at this point would be grossly irresponsible.

  3. Of course on the other side of the fence, is if the trustees are found to be untrustworthy. It would be just as irresponsible to be just watching, rather than having the books be transparent for all to see, or not. I have never known the former to be a case presented to the American people.

  4. Moses Herzog

    From John Boehner’s twitter account:
    “POTUS wants a $2.4T blank check to get him through the next election, w/out cuts that exceed the hike. This is indefensible.”

    Senator Boehner should know, he is the master of indefensibly written checks:

  5. Moses Herzog

    More from Senator Boehner’s Congressional record. Remember as you read this that Republican Boehner supposedly hates wasteful spending. Say for example, if it was for pork projects in Ohio related to weapons the Pentagon doesn’t even want. Taken from a report written by Scott Lilly of the Center for American Progress. See original story here:

    http://www.americanprogress.org/issues/2011/02/boehner_earmark.html

    “But buried deeply in these 359 pages of ugly surprises is a provision that would mean one community in America would do a lot better than all of the others. The legislation added an estimated $450 million for a particular bit of defense spending that the Department of Defense did not ask for and does not want.
    The item is a down payment that would obligate the federal government to future payments that could well be three or four times the increased spending added to this particular piece of legislation, with a big portion of the funds flowing to two cities in Ohio—Cincinnati, where Speaker of the House John Boehner (R-OH) grew up, and Dayton, the largest city in his congressional district.
    The money will go to pay the costs to General Electric Co.’s General Electric Aviation unit and the British-owned Rolls Royce Group for their development of an engine for the new Joint Strike Fighter aircraft—money that looks, feels, and smells very much like an earmark.”

    Boehner, the big lying Orange Julius http://www.oodora.com/wp-content/uploads/2007/10/orange-julius-drink.jpg talking about wasteful spending. I guess the big lying Orange Julius thinks giving federal government dollars to British contractors for weapons the Pentagon doesn’t want, is really going to help solve our nation’s debt. Or is it only good for the lying Orange Julius’s re-election bid???

    Who is the one “asking the American people for a blank check”??? You be the judge.

  6. BRUCE E. WOYCH

    (1)
    LIFTING THE VEIL:
    This film explores the historical role of the Democratic Party as the graveyard of social movements, the massive influence of corporate finance in elections, the absurd disparities of wealth in the United States, the continuity and escalation of neocon policies under Obama, the insufficiency of mere voting as a path to reform, and differing conceptions of democracy itself.

    http://topdocumentaryfilms.com/lifting-the-veil/

    (2)
    ZEITGEIST: Moving Forward
    Produced by Peter Joseph

    http://www.sprword.com/videos/zeitgeistmovingforward/

  7. Gregg Schaaf

    “With Social Security, people can see exactly what they’re getting for their payroll taxes, and as a result they strongly prefer raising payroll taxes to cutting benefits (Times poll, question 43). They also feel the same way about Medicare (question 39), perhaps because people think that Medicare is fully funded by payroll taxes.” While I have not studied the poll results which are apparently being relied upon to support the assertion about Social Security, it strikes me as patently absurd when attributed to younger people or when looked at objectively. A young person’s payroll taxes are used to pay current beneficiaries as income is used in a ponzi scheme. There is no escrow account nor any binding obligation to pay future benefits. What a young person sees is that his income is being taken by the baby boomers and that he has no security as to whether foreigners will lend the Federal Government the money to pay him benefits when he retires decades hence. If he does see what he is getting, he sees that he is being milked while the can is being kicked down the road.

    The credibility of our government has eroded. There is a parallel loss of trust in the rule of law as financial entities are not prosecuted for crimes. With the erosion of credibility in government, and also the loosening of bonds between fathers and children in the family structure, we get a diminished willingness to sacrifice for others including future generations. Hence flexibility is lost. With the erosion in trust in the rule of law, we eventually cause capital flows to leave for other shores. This too reduces our flexibility and the capacity to make long-term changes necessary to address new challenges.

  8. @gregg “What a young person sees is that his income is being taken by the baby boomers and that he has no security as to whether foreigners will lend the Federal Government the money to pay him benefits when he retires decades hence.”

    Maybe they need glasses to see better?

    EVERYTHING you take for granted was given to you by the previous generations of producers and wealth builders.

    You embrace only one *vision* – Nihilism. No generation on earth was GIVEN more in the way of civilization and culture – no, Sir, you have no excuse for not being able to kick the ball into the future…

  9. James, I do not know why you would NOT include interest on trust fund as receipts to Social security, it should be included as such in your analysis and that interest should show up as an expense in ALL ELSE (in your analysis). As a matter of fact if Social Security chooses to redeem some of the trust fund, that expense should go under ALL ELSE. The trust fund securities should be treated NO DIFFERENTLY from our debt to China or the banks.

  10. formerjournalist

    Thank you Annie for your pithy comment. I am so tired of libertarians, among others, under 45 blaming me and my fellow Boomers for everything they perceive is wrong with our country.

  11. So if defense is 20% of GDP, then it’s deficit is 20% of GDP?

  12. The problem of Medicare is that providing a extremely generous to seniors while providing no health insurance to people in working age is idiotic. Besides that, these programs should be treated as welfare, not as insurance. People aren´t willing to pay more for SS or Medicare if they think that they are insurance, but they think that they are paying all the cost directly.

    And there is a necessity to have a *progressive* system for these programs. Wealthier people should get less benefits, and pay more.

  13. “which is the big reason why most Democrats want to raise income taxes on the rich”…..the unspoken definition of “rich” is anyone with a job.

    James- Why are you talking about the 2021 budget?….how about fixing the 2012 budget first.

    Just a basic Liberal democrat ploy. Talk about something other than the problem while pretending to solve a problem.

  14. CBS from the West

    @ Bill Munny

    No, it’s not a ploy. The 2012 budget is still subject to the hangover of safety-net spending triggered by the financial crisis of 2008. It is also a victim of the extension of the Bush tax cuts, and weighted down by the costs of three wars. If you look at projections going out, you will see that even doing nothing, these exceptional effects are expected to decline. Furthermore, cutting government spending _now_ will be disastrous–it will choke off the minimal recovery we have seen and through us into a “double-dip” recession or Great Depression II.

    Long term, we need to get health care under control–it is the source of most of the problems facing the government’s finances and nearly all of the financial problems facing the private sector. But that can’t be done overnight–even a genuine concerted effort will take several years to take effect (and there doesn’t seem to be any appetite in Washington to tackle this anyway).

    So the sensible thing is to end the wars and stay out of new ones, sleigh the health care monster, don’t get suckered into extending tax cuts that bleed us dry, and let the safety-net spending dissipate as the economy eventually returns to something more like full employment. The time line is such that 2021 is a pretty good place to see what things should look like going forward.

  15. @ spiral007

    “The Trust Fund securities should be treated NO DIFFERENTLY from our debt to China or the banks”

    If only that were true?

    Ref: China’s maintain of debt, explained. by David Case 7/8/2011 (Globalpost/ Asia Pacific)

    http://www.globalpost.com/dispatch/news/regions/asia-pacific/china/110707/china's-mountain-debt-explained

    Ref: Who owns America? Hint: It’s not China. by Thomas Mucha 7/23/2011 (Globalpost)

    http://www.informationclearinghouse.info/article28670.htm

    Please note; If link fails must be Title reference “Google’d,…

    PS. As long as the American people own most of the debt, we are safe (think of Japan?). :-)

    Thankyou James and Simon

  16. @ CBS form the West – “So the sensible thing is to end the wars and stay out of new ones, sleigh the health care monster, don’t get suckered into extending tax cuts that bleed us dry, and let the safety-net spending dissipate as the economy eventually returns to something more like full employment. The time line is such that 2021 is a pretty good place to see what things should look like going forward.”

    And so what are you going to spend *fiat* money on TODAY?

    All flows of FIAT $$$ into life-maintenance are being shut off….there is no 2021 $$$ if there is no $$$ flowing today – scheesh…

    You REALLY want to watch the slow death of 3 billion people for the next decade….?

    If that’s THE PLAN, then you are going to have WWIII in no time flat because it would be a JUST WAR – what part don’t you understand about competition and fair play when SURVIVAL is at stake…?

    You think I’m not going to go after “owen owens” with Annie’s gunz a’blazing and a small army of really smart people…? I did NOTHING to that creature to hurt him and out of the blue the dude made a public pledge to “hurt her even more”…do I strike you as a fool?

    Seriously, War Lords and Drug Lords inheriting the earth without a peep from 3 Billion people?

    That’s so delusional that I must pause and consider extending mercy to people so obviously deluded, but then again, once you’re at the rabid raccoon stage, it’s mercy to end it…

  17. @CBS – check out today’s pronouncement from the land of *god’s work* – the “czar” and his “science” used for cost-cutting health care expenses to the first responders of 911 at the WTC…..shouldn’t big pharma – sitting on mountains of cash and complaining about the cost of bringing biotechnology to the market – be studying this unique class of patients (ready made clinical trial, no?) for HOW they are getting cancer? No data there of interest for *innovation* in cancer research…? Oh wait, let’s first give 1.1 billion to a not-think tank to design “informatics” to collect the data and hope some more will die in the meantime to drive down the *cost* – for whom, though, is the question…

    There is no pretense of a moral ground for any of self-proclaimed “god’s workers” to stand on – that jig is over.

    Budget doesn’t take into account the possibility of *innovation* driving down health care costs, does it?

    It’s what we do TODAY that makes all the difference to 2012.

  18. Anony-mousy

    The Modified Andover Controversy: An unwritten law that if 5 people were to be in the same room together, one of them would be guilty of a crime. It has worked well for me in the past concerning deficits.

  19. @ Annie, yes, indeed, INHALING and INGESTING two 500,000 ton buildings that turned to dust before everyones EYES, should be a baseline data-opportunity for Big Pharma to do something unique for these un-selfish first responders, to be sure.

  20. Just a wee-bit off-topic, but has so much to do with the elasticity of a polarized congress and getting the orbital trajectory of the established Hamiltonian Fiscal Laws of the universe back in proper alignment.
    Question,… is a far-far left democratic party (Obama & Co.?) feasible — and if so, has it finally been flushed out?

    Commununitarian’s versus Libertarian’s? This certainly could/ would/ should solve the far-far right republican tea party lopsidedness. Shall we call the opposite of Tea Party (TP’s),… the Coffee Party (CP’s?)
    Is it time to get them on the ballot as a bonifide legitimate party as a counter weight,… what say you?

    Ref: “Libertarians Rising” by Micheal Kinsley (10/18/07)

    http://www.time.com/time/magazine/article/0,9171,1673265,00.html

    Thankyou James :-))

  21. @earle – man o’ man you poets do live in your own world

    40% of the country’s voters are registered INDEPENDENTS.

    Please look up Nihilism on wikipedia – this whole peurile game of calling a duck a peacock is getting annoying – your 1% Libertarians are Nihilists.

    Here’s from my favorite book – a POSITIVE observation of we the stupid – “Your religion is becoming real because it is emerging from the slavery of fear and the bondage of superstition. Your philosophy struggles from dogma and tradition. Your science is engaged in the agelong contest between truth and error while it fights for deliverance from the bondage of abstractionism, the slavery of mathematics, and the relative blindness of mechanistic materialism.”

    The pinheads are cutting the payments by keeping 20% (and now more – thanks to blogs like this one) of the USA population unemployed for at least two years – that’ll bring down the monthly payout to grandma…

    My favorite attempt at kicking the ball into the future still is the line about how slave $$$ was never in any account to begin with – yours, mine, the SS Fund…it was an abstract concept….

    Like shooting fish in a barrel that diabolical Patriot Act – all those financial statements on everyone right into the greedy blood soaked paws of the 187,000 mercenaries to pay them off BEFORE they went in since the *war* was not officially on the books….

    Bend your knee to War Lords and Drug Lords – “….in the beginning there was *MONEY* and then came life – life we don’t want interfering with our *MONEY*….”

    Talk about dogma and tradition – GREED from the heart of hate is a *religion* – greater than any before and the desire of eternity to keep it that way….

    I guess for those who so enjoyed the torture discussion for YEARS on *media* will be orgasmic watching billions suffer and die without *personalized* health care – check out all the religious blogs PROMOTING suffering and *sacrifice* for someone else – always for someone else….

    No moral ground left to stand on – now we’re getting to the fair fight….

  22. Anony-mousy

    We read all the books, but STILL can’t find the answers.

  23. @anony – you’ve obviously not programmed the software correctly

  24. No I havn’t, it was a big pain in the neck at the time, I’m glad that it is over with now though. You seem to have nailed it down comfortably good, that nasty software, that is.

  25. What urban legend said. And what spiral007 said.

    Which leads me to my main point. The title is “Understanding the Budget Deficits” but the appropriate title would have been more along the lines of “My Personal Biases and Policy Preferences, Budget-Wise” or some such thing. You’ve fallen into the pundit pit. A big-name publication is providing you a place to write and you’re using it to offer personal views in the guise of explaining how things work.

    Every guy on every barstool in the land has an opinion. If I want opinion, I can go to a bar. When I come here, I expect something better than what I can get from the next barstool.

  26. Anony-mousy star

    Too much talk about job creation and not enough about the reality of jobs deficits, and obviously about how it got this way.

  27. S.D. Jeffries

    If our elected “leaders” would spend half as much time figuring out how to put the unemployed in this country back to work as they do arguing about the illegitimate debt ceiling “crisis,” much of the budget deficit would take care of itself, and the country could concentrate on the serious long-term problem of the inexorable rise in health care costs. Until we do something intelligent about providing health care coverage for all citizens like all the other industrialized countries of the world have done, long-term debt will continue to be a problem.

    Of course solutions to both these problems, long-term and short-term, require innovative ideas and intelligent discussion, things the current crop of corrupt lawmakers in thrall to their ideological convictions, particularly Republicans, are completely incapable of accomplishing.

    Until the voters insist on increasing the intellectual and ethical level of our elected representatives, this country will continue to languish, the majority of its population falling further behind their own expectations as well as the realities of life in other advanced countries, and our progress will remain constrained by the inequalities in our society. Looking at the fix we find ourselves in today, the situation is akin to that of an addict, in this case an addiction to bankrupt ideology. Like any addict, we will probably have to suffer enormously and hit bottom before the healing can begin.

  28. Bruce E. Woych

    EGADS! This is no time for truth !!!

    http://rwer.wordpress.com/2011/07/28/gop-bad-faith-on-the-debt-ceiling/

    GOP bad faith on the debt ceiling
    July 28, 2011 Kevin P. Gallagher (Leave a comment) … Go to comments

    from Kevin P. Gallagher

    http://rwer.wordpress.com/2011/07/28/gop-bad-faith-on-the-debt-ceiling/

  29. Bruce E. Woych

    Debt deal: Is it a deal?
    July 21, 2011 peterradford (Leave a comment) … Go to comments

    from Peter Radford

    http://rwer.wordpress.com/2011/07/21/debt-deal-is-it-a-deal/

    excerpt from a well informed Commentator
    “:Society Should Never Reward Private Savings, which will be given at the 2011 ICAPE Conference (http://www.icape.org/) and may be downloaded from http://www.macroambiente.com.br/downloads/material_in_english/society_should_never_reward_private_savings.pdf.” (Gerson Lima)

  30. American’s all live by a budget, and in most circumstances are quite generous with their pen`money (what little they have), but the concept of “Charity Begins at Home” seems to have been lost in the last three decades? It seems the old cliche`has been captured (kidnapped and held hostage?) under the guise, “shame on you who have so much,…guilt syndrome. Unfortunately since – American’s have been paying the “Lion’s Share of the World’s Foreign Aid”! That is to say, that our (United States) Foreign Aid is no more than a hefty gratuity to satisfy our Multinational’s ravenous appetite of world dominance at the expense of poor nations,.. and the poor of America. As I write, the U.S. Congress is finding ways to cut discretionary spending to the poorest of the poor American programs! Such diabolical poetic justice is certainly pornographic when not one cent will be cut from Foreign Aid!

    Ref: “Foreign Assistance Budget – US Department of State”

    http://www.whitehouse.gov/sites/default/files/omb/fy2012/assets/state.pdf

    Ref: “Foreign Policy of the United States”
    http:en.wikipedia.org/wiki/Foreign_policy_of_the_United_States

    Ref: “Center for American Progress” [pdf]

    http://www.americanprogress.org/2011/02/foreignaid.html

    Ref: “Foreign Commerce & Foreign Aid” [pdf-1296/97/98]

    http://www.census.gov/compendia/statab/2011/tables/11s1296.pdf

    http://www.census.gov/compendia/statab/2011/tables/11s1297.pdf

    http://www.census.gov/compendia/statab/2011/tables/11s1298.pdf

    Please note if link fails followed titled ref. @ Google :-()’

    Thankyou James and Simon

  31. “Three Integral Parts of a Budget” (Why is something so simple made so complicated? Don’t answer,..rhetorical sarcasm)

    #1) Unemployment (9.2 ml counted & ~18 – 20ml uncounted as the ‘REAL’ aggregate total and somehow will be glossed over by the current administration as the norm,… keep your blinders on?)
    #2) Trade Imbalance ( http://en.wikipedia.org/wiki/Economy_of_the_United_States
    http://en.wikipedia.org/wiki/Import_Certificates (scaled tariffs)

    http://en.wikipedia.org/wiki/Net_international_investment_position

    http://en.wikipedia.org/wiki/Trade_deficits

    Ref: “The Bichar & Nitzan Archives” – Regimes of Differential Accumulation: Mergers, Stagflation, and the Logic of Globalization___– Review of Int’l Policy Economics; Vol.8.No.2.pp 226-274___Abstract

    http://www.bnarchives.yorku.ca/3/01/010800N_Regimes_of_differential_accumulations.pdf

    #3) Military (currently our military accounts for the “Lion’s Share” of our revenue spending {SSA & Medicare pays for itself with a balance mind you} and the GOP just wants more – we can’t afford being the worlds police, while leaving our own nation bare-ass and vulnerable!

    Well that’s about it,… but keep this in the back of your heads – Q1/ 2011 GDP revised downward to 0.4% from 1.9%, and Q2/ 2011 will probably be not far behind when last revision shows its ugly face?
    Lastly, when Obama gets this Balanced (Ceiling) Budget passed and comes back through the backdoor appointing his *committees with the permission of the oligarch – the **trigger happy Big Boys will have open season on Entitlement Programs! (JMHO)

    Thankyou James and Simon