There is a Bigger Elephant in the Room

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Troubling projected budget deficits are driven by large mandatory entitlement programs, defense spending and interest payments, making it difficult to reduce government spending.

You may have missed this in the news. For the first time since 1982, the federal government is going to have to dip into the social security trust fund in order to pay out benefits this year. In other words, the social security program will pay out more this year than it collects through the 6.2% payroll tax plus earned interest. The reasons for the shortfall are quite simple. People are living longer and the overall population is aging, shifting the balance between the working population paying into the program and the retirees collecting benefits. There are currently 61.5 million Americans collecting social security and 58.4 million using Medicare. The solution is not quite as simple. The government can cut benefits, raise the retirement age, raise the payroll tax, eliminate the earnings cap on payroll deductions, increase immigration or combine a mix of some or all of these options. In addition, a boost in the below trend U.S. economic growth and productivity would certainly take some of the heat off the program. We are not yet at Chicken Little conditions but this is a serious burden. Payments to individuals were 67% of the 2017 federal budget. Surprisingly investors seem relatively unruffled. However, on the other hand, the interest on the federal debt, which was only 6% of the federal budget, is frequently being labeled the elephant in the room. Please see page 73 of the Global Perspectives book for a breakdown of the federal budget.

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