Guest Post: The Promises That Cannot Be Kept

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

The Promises That Cannot Be Kept

The government's promises, for pensions and healthcare and everything else, cannot be kept. We as a nation will eventually have to have a truthful conversation about that reality.

The fact that the Federal government cannot possibly fund the entitlement/ benefit programs that have been promised to the citizenry is well-known, but remarkably unwelcome. I have addressed this difficult reality dozens of times, as have hundreds of other commentators, for example:
To Fix Social Security, First Ask Why It Is Deep in the Red (January 18, 2011)
Is the Recovery "Self-Sustaining"? Here's a Test (March 22, 2011)
If You Want Solutions, First Pin Down Where the Money Is Going (May 23, 2011)

Bruce Krasting recently penned a wonderful evocation of the bitter "I, Me, Mine" rage this reality triggers in Americans: I go to a 4th of July party (Zero Hedge).

The typical reaction is either denial, mixed with wishful thinking--if only we taxed the rich and cut out war spending, everything could easily be funded indefinitely--or rage against anything and everyone that threatens the individual's own share of the swag.

Krasting brilliantly depicts the net result, which I call internecine conflict between protected fiefdoms in Survival+: the constituency of each fiefdom--Social Security, Medicare, Defense, etc.-- will undermine the other fiefdoms to maintain their slice of the dwindling Federal pie. This leads to a profound political disunity which cannot be overcome with compromises, as that would require deep cuts in all government programs.

None of this is new. Richard W. Fisher of the Dallas Federal Reserve laid it all out very succinctly back in May 2008, before the global financial meltdown. Now of course, the situation is much worse: Social Security is already deeply in the red, for example, a condition that wasn't supposed to occur until 2017. If we removed Federal and Federal Reserve stimulus, the economy would immediately contract 11%.

The entire notion of entitlements based on age requires an ever-expanding population of working contributors and an ever-expanding economy. If either condition isn't met, then the programs fail. Fisher's message is clear: our entitlement programs will fail because there is no way to raise $100 trillion in additional taxes in a declining economy.

Storms on the Horizon:

Please sit tight while I walk you through the math of Medicare. As you may know, the program comes in three parts: Medicare Part A, which covers hospital stays; Medicare B, which covers doctor visits; and Medicare D, the drug benefit that went into effect just 29 months ago. The infinite-horizon present discounted value of the unfunded liability for Medicare A is $34.4 trillion. The unfunded liability of Medicare B is an additional $34 trillion. The shortfall for Medicare D adds another $17.2 trillion. The total? If you wanted to cover the unfunded liability of all three programs today, you would be stuck with an $85.6 trillion bill. That is more than six times as large as the bill for Social Security. It is more than six times the annual output of the entire U.S. economy.

I want to remind you that I am only talking about the unfunded portions of Social Security and Medicare. It is what the current payment scheme of Social Security payroll taxes, Medicare payroll taxes, membership fees for Medicare B, copays, deductibles and all other revenue currently channeled to our entitlement system will not cover under current rules. These existing revenue streams must remain in place in perpetuity to handle the “funded” entitlement liabilities. Reduce or eliminate this income and the unfunded liability grows. Increase benefits and the liability grows as well.

To solve the entitlement deficit problem, discretionary spending would have to be reduced by 97 percent not only for our generation, but for our children and their children and every generation of children to come. And similarly on the taxation side, income tax revenue would have to rise 68 percent and remain that high forever. Remember, though, I said tax revenue, not tax rates. Who knows how much individual and corporate tax rates would have to change to increase revenue by 68 percent?

For the existing unfunded liabilities to be covered in the end, someone must pay $99.2 trillion more or receive $99.2 trillion less than they have been currently promised. This is a cold, hard fact.

Though I've addressed this many times before, let's walk through it one more time. Let's start with the income side of the ledger, Total Personal Income in the U.S.:

Total personal income is defined by the United States' Bureau of Economic Analysis as income received by persons from all sources. It includes income received from participation in production as well as from government and business transfer payments. It is the sum of compensation of employees (received), supplements to wages and salaries, proprietors' income with inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj), rental income of persons with CCAdj, personal income receipts on assets, and personal current transfer receipts, less contributions for government social insurance.

In other words, total personal income includes all the entitlement spending and government benefits such as extended unemployment, Section 8 housing, etc. As Mish recently explained, personal transfers now eat up all Federal tax revenues: $2.4 trillion in, $2.4 trillion mailed out.

If we set aside our own fond hopes for Social Security checks being deposited into our personal accounts and Medicare to survive long enough to pay for our own care, we conclude this is a staggering imbalance. The promised programs are already consuming every dollar the government collects, and the Baby Boom has barely begun to retire.

Perhaps a few million of the 76 million Boomer generation has started collecting Social Security, and the first Boomers, born in 1946, are just now qualifying for Medicare. That these programs have already expanded to the point that they consume all revenues should give pause to anyone still in the denial or rage stage of the denial/anger/grief/resignation/acceptance cycle.

Earned Income is flat to down. Here is a chart of total income:


There are two components of income: wages and non-labor, which includes dividends, interest, capital gains, rental income, and other investment income.

Charts: Conerly Consulting

The handsome rebound in Corporate America's profits--roughly 11% of the entire GDP at $1.6 trillion--and the Fed-engineered "permanent rally" in stocks has goosed non-labor income for the top 10% who own these income streams, but it has also bolstered the pension funds that millions of state and local government retirees depend on. (When the stock and bond markets implode, so will all those pension funds' promises.)

Personal income has "recovered" only as a result of greatly increased Federal transfer payments. If we subtract all those government transfer payments, income has cratered:


Government transfers now account for 22% of household income, an unprecedented dependence on Central State checks and benefits:

Click on chart for full-sized chart in a new browser window.

Employment is down and is not recovering. I have addressed why many times, what author Jeremy Rifkin termed "the end of work." So any projections based on a rapidly growing workforce are not reality-based.



All the "growth" of the past decade was simply borrowed, as our private and public debt has soared. If you borrow cash from your credit card and spend it, is that really "income"? No. Here is the national "credit card" account. Does that look sustainable?

Notice how much of the decade's income was equity extraction during the housing bubble. That source of borrow-and-spend is gone.

The problem is that the benefit costs are not static; they're constantly moving ever higher because the programs are expanding 3, 4 or 5 times faster than the real economy. Here is a chart of local government healthcare and pension costs. Does this look remotely sustainable?

Here is a chart of our national healthcare (a.k.a. sickcare) spending. Compare this rocket-ascent path to the moon with the chart of declining income and the skyrocketing debt.

Many readers suggest that cutting Defense and raising taxes on the wealthy will preserve these entitlement programs. Unfortunately the math doesn't pencil out, for the reason noted above: when expenses are rising by 6% to 11% a year, every year, and your income remains flat to down, then in a very few years, those expenses will eat up your entire income.

But let's do the math. Let's knock a third out of the Defense budget of around $730 billion, saving $250 billion a year. (Never mind the fierce fight that fiefdom would put up.) Let's increase taxes on the super-wealthy (good luck getting them to pay it) and the plain old wealthy and you might raise $500 billion more a year.

That is questionable for a number of reasons, most saliently that the wealthy already pay most of the Federal income tax, which is quite progressive on earned income: The Problem with "Tax The Rich": It Won't Work (May 28, 2010).

The top 5% earn about 22% of the income, and they pay about 60% of Federal taxes. As many readers have pointed out, the total tax burden, including sales tax, property tax, etc. is heavier on lower-income workers as a percentage of income than it is on the super-wealthy (top 1%), who pay around 17% of income in taxes. But no matter how you slice the data, the fact remains that the top 5% already pay a hefty percentage of earned income in taxes, and they also pony up 60% of all Federal income taxes.

The top 1% could certainly stand to pay more than 17%, but the problem there is that capital is mobile now and anyone paying taxes on their global income in, say, Switzerland, cannot be made to pay taxes elsewhere on that same income. (Income and corporate taxes are low in Switzerland compared to the U.S. and Europe.)

We can rail against this reality, but capital will flow to the highest returns and lowest tax rates. We should impose the same tax rate on non-labor as we do on labor, and that would raise a a few hundred billion more a year. But let's also recall that the Federal government is borrowing $1.6 trillion each and every year, fully 11% of the nation's GDP and 40% of Federal spending, so even $500 billion more simply isn't going to rectify the budget shortfall or long-term situation.

Studies have found that taxes are remarkably stable at about 20% of GDP. It seems that attempts to raise taxes above that share of the economy trigger blowback in the form of tax avoidance, capital flight, voluntary reductions in income, etc.

But let's say you do manage to strip out $250 billion annually from Defense and Homeland Security/War on Global Terror (GWOT), and boost tax revenues by $500 billion a year (a 21% increase in total tax revenues). Together, that would generate $750 billion annually, or $15 trillion over 20 years.

I haven't found any firm estimates of the unfunded liabilities due in the next 20 years, but since 25% of the entire population (the Baby Boomers) will be retired and drawing on Social Security and Medicare within 15 years, I think we can reckon that about half that $106 trillion will come due in the next 20 years--and that is probably absurdly conservative.

$15 trillion down, $35 trillion to go. Do you see how utterly hopeless this exercise is when Federal spending rises by 6.5% every year even as the underlying economy muddles along at 2% in good years and -5% in poor years, if we subtract borrow-and-spend deficit financing?

In other words, $100 trillion in unfunded liabilities is the number now, but if spending continues rising at triple the rate of the real economy, then that number will only grow.

If we're honest about our accounting, then the U.S. economy hasn't grown at all since 2008; it's shrunk by $6 trillion, a sum we have masked by borrowing and spending $6 trillion in Federal debt, money that replaced the decline of private borrowing and spending.

Please look at the charts of healthcare and local government pension and healthcare costs again. Those rocket-launch lines shooting higher cannot be funded by a national income that is flat or declining.

We need a national conversation about reality, not wishful thinking. We need to grasp the nettle and talk about triage, about conserving Social Security for those with no other sources of income, and about devoting our scarce resources for palliative and preventive care. The Status Quo is completely, utterly unsustainable, but that needn't bring the nation to its knees--unless we actively insist that it does so.

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Yen Cross's picture

 Even the Unions are Effin them selves!

eureka's picture

So does that mean US empire will prevail?

Buck Johnson's picture

Totally to late.  The politicians know this already, but they can't go out there and say it.  If they went out today and said that we will have to cut Medicare and Medicade by 50% and SS will be cut by the same and taxes raised across the board (and this wouldn't help anyway), there would be riots in the streets.  Because most people have maybe maybe 10,000 in savings (probably a few thousands) at retirement and what they can get from SS and Medicare/Medicade.  They are in poverty from the get go, and know these politicians are telling them that they will be even more in poverty from the cuts and tax increases (which will make things more expensive).  I've said this more than once over the few years of this fiasco, and that is we have kicked this can down the road so much that finally we see the end of it and are trying to kick the can via small small kicks. 

When the US empire finally leaves the international stage, it will leave it showing it's Schizophrenia.  Because our populace and our people will be delusional to what they have been told and believed for so long.  We will end up a splintered third world nation, and we be a nation that will be broken into 5 to 6 parts that will be seperate entities (essentially countries) themselves.  I read Plato's republic and he was right about what has to be done in order for a republic to flourish, and we did the opposite.

roadlust's picture

We don't have "scarce resources," we have vast misallocation of them.

Until the resources are distributed equitably and sanely, there will be a faux "crisis."  But there is always a "crisis" before the revolution.

Creating tax policies and laws that encourage a middle class again would be a start.  Progressive Taxation for instance. 

Of course we could always just cancel all US Dollars, private property deeds, laws that protect money instead of democracy, etc. and start over.  Why would "smart people" fear that???






Fukushima Sam's picture

I say we crash this bitch, get some creative destruction going on, and see what kind of phoenix will rise from the ashes.

I recently read "The Fourth Turning" and all this strife seems inevitable once you see it from a historical cycle point of view.  Does Gen X really want to maintain the empire built by their parents and grandparents?  Is a generation alienated and underprotected by its parents then going to take care of them when they need it?  Even if they wanted to, will they be able to?

eureka's picture

To Roadlust, RE: "Creating tax policies and laws that encourage a middl class again would be a start" - I concur - and in that light Charles Hughes Smith does NOT provide the solution:

The top 1% could certainly stand to pay more than 17%, but the problem there is that capital is mobile now and anyone paying taxes on their global income in, say, Switzerland, cannot be made to pay taxes elsewhere on that same income. (Income and corporate taxes are low in Switzerland compared to the U.S. and Europe.)

We can rail against this reality, but capital will flow to the highest returns and lowest tax rates. We should impose the same tax rate on non-labor as we do on labor, and that would raise a a few hundred billion more a year.


1) if the rich want ANY access to any of OUR national markets, OF COURSE we can make them pay - IF WE WANT TO. We can tax imports, live within our means and work toward true energy and manufacturing independence. If we want to!

2) taxing non-labor the same as labor income in a world of out-sourcing and robotization is anachronistic - i.e. plainout a non-solution, i.e. stupid. OBVIOUSLY, one stimulates small and local businesses and employment by encentivizing IT - and not globalist mega corporations.

CHS's observations are fair - his consclusions and recommendations do not stand up, but rather are non-sensical and or globa-capital-collectivist troll'ish.


trav7777's picture

the nation is rotten from top to bottom.

From the deadbeat homeowners to the CEO of the banks.  From the union rank-and-file up to their chiefs.  Crooked, corrupt, all on the take.  Ghettofied society.

andybev01's picture

Somewhere we them folks got the idea that a strong sense of community was akin to collectivism and shunned all sense of an orderly society.

Within 2 generations (the greatest and their spawn, boomers) we dis-integrated into what we have today; I've got mine so f*ck you.

I gleefully look forward to the coming-soon-to-a-lawyers-office-near-you, battles over family trusts and which third-tier nursing home Ma & Pa are going to.

Spastica Rex's picture

God bless the child and whatnot.

We spent the last third of a century nurturing consumption and narcisissm. We built giant houses and flitted about the world and drove land barges to and fro. We worshipped clebrities and scandal. We could have done something else, but we didn't. It's all about choice; none of the problems we have were inevitable.

The 400 or so year experiment of a world without kings is drawing to a close.

wisefool's picture

+1. The current idocracy winds down within 10 years or so. Then, as you mentioned, the return of the "peerage." But it aint gonna be like what the sheep saw at the recent royal wedding.

Based on todays headlines, think more like Dune, with Casey Anthony types as bene gesserit. And former steriod abuser athletes as the barons. 

Spastica Rex's picture

One of the favorite books of my youth, brought to life.

silvertrain's picture

Bullseye hit.. A large portion of that is the loss of morals..People dont give a fuck..

chumbawamba's picture

And then there are the blog commentators.

andybev01's picture

*PSST: where's your signature?*

eureka's picture

RE: "...all on the take" - exactly, and especially the elite and its military & security complex.

"Government transfers now account for 22% of household income, an unprecedented dependence on Central State checks and benefits" - DOES THAT INCLUDE WAGES AND EQUIPMENT PAYMENTS FOR THE MILITARY & SECURITY COMPLEX's COMPLETELY USELESS EXISTENCE? 

80% of US citizens have zero net worth - so what assets do they have to protect? NONE!



carbonmutant's picture

What we have is a nation that wants to ignore the news.

We voted for change it's not our fault...

lynnybee's picture

  " We voted for change it's not our fault..."

correct.  we were lied to & scammed & stolen from.    but, we can claim stupidity.    i know that i was extremely dumb until i started studying & doing my internet research (thank you,ZEROHEDGE) .   ....... I'm not dumb anymore; but, 99% of the citizenry is still uneducated & ill-informed.



Steaming_Wookie_Doo's picture

That's the point that's missed. That SS trust money was "reallocated" (plundered) in the 70s. No one is really acknowledging that, nor has anyone been charged with any crime. We've also held interest rates artificially low, which has helped contribute to that deficiency as well.

Now of course, we will blame the those present and future SS claimants who've been told that the $$s there, no worries. Now that the time has come to make a claim, these people, who had money deducted from all their paychecks, are considered lazy criminals. Of course, once someone quits their job, they are usually destined for poverty, which necessitates the monthly SS check. One can say "well you shouldn't retire", but some folks get forced out of their jobs, have physical breakdowns, etc that come into play.

I'm sure the (unspoken) solution will be that lots of folks will have to die to save on medical/benefits costs. How many of the 75 million boomers will have to die to "rebalance" the books? Wanna bet they could all be dead and we'd still be fucked?

High Plains Drifter's picture

may i suggest that you all, purchase things like this. you will need them soon. such things as this are the poor man's assault rifle complete with pig sticker, so that when you get near them you can give them something to remember you buy(at least for a few minutes) , up close and personal, which is the only way to do it when you are dealing with traitors. George Washington, would agree with this message , I bet........

MassDecep's picture

and to think, i just aquired an fn scar! Looks like a pretty nice sticker, 7.62 x 39 no less. Capacity of mags needs to exceed 30! ahhh, the scar is too sweet though.....

High Plains Drifter's picture

they make adapters for that problem.

High Plains Drifter's picture

very nice. expensive, but very nice.  i want one of those too.  right now, i have my eye on a us optics sn3 for long ranges. i have to go get my college degree so i can use it effectively.

Yen Cross's picture

 I have my " High velocity" tools HPD. The liberal junksters  are a hoot!

High Plains Drifter's picture

cool.  i know many of you do.  i know many of you think that my mind is not in a good place. well perhaps you are right. many of you perhaps think that my mind is one evil thoughts about the government.  well perhaps you are right about that one too.


what else should an American think these days. It is time to deal with these issues one way or the other.

eureka's picture

RE: "what else should an American think these days?"

There IS no "America", no "Americans" - only the mythical concepts these terms allude to.

There is only a corrupt, elite-run Federation, manipulating a mass of atomized, pseudo-individualized, self-absorbed gamblers/leverage-players and consumers.

"America" - i.e. the US Corporatist Federation - is demolishing all remnants of social cohesion and common, national identity/purpose, replacing it with individual self-absorption.


Clark Bent's picture

Shhhh, that's "liberation" ya got there. Just quiet down and accept yer gay "marriage." After all, we need to be liberated from all these regressive institutions. 

RockyRacoon's picture

20 Not So Good Categories That The United States Leads The World In

The Economic Collapse
July 5, 2011

Is the United States “number one”?  Many Americans take deep pride in their nation and the truth is that the U.S. has a lot going for it.  The United States has the largest economy in the world.  The United States also has the most powerful military on the entire planet.  The United States has produced most of the greatest movies that the world has ever seen.  But the United States is also number one in a lot of categories that are not go great.  If we ever want to turn this country around, we need to be very honest with ourselves.  We need to take a long, hard look in the mirror and realize that it is not a good thing that we are number one in divorce, drug addiction, debt, obesity, car thefts, murders and total crimes.  We have become a slothful, greedy, decadent nation that is exhibiting signs of advanced decay.  Until we understand just how bad our problems really are, we won’t be able to come up with the solutions that we need.

A lot of people that write articles like this have a deep hatred for America.  But that is not the case with me.  I love the United States.  I love the American people.  America is like an aging, bloated rock star that has become addicted to a dozen different drugs.  America is a shadow of its former self and it desperately needs to wake up before it plunges into oblivion.

If you do not believe that America is in bad shape, just read the list below.  The following are 20 not so good categories that the United States leads the world in….

#1 The United States has the highest incarceration rate in the world and the largest total prison population on the entire globe.

#2 According to, the United States has the highest percentage of obese people in the world.

#3 The United States has the highest divorce rate on the globe by a wide margin.

#4 The United States is tied with the U.K. for the most hours of television watched per person each week.

#5 The United States has the highest rate of illegal drug use on the entire planet.

#6 There are more car thefts in the United States each year than anywhere else in the world by far.

#7 There are more reported rapes in the United States each year than anywhere else in the world.

#8 There are more reported murders in the United States each year than anywhere else in the world.

#9 There are more total crimes in the United States each year than anywhere else in the world.

#10 The United States also has more police officers than anywhere else in the world.

#11 The United States spends much more on health care as a percentage of GDP than any other nation on the face of the earth.

#12 The United States has more people on pharmaceutical drugs than any other country on the planet.

#13 The percentage of women taking antidepressants in America is higher than in any other country in the world.

#14 Americans have more student loan debt than anyone else in the world.

#15 More pornography is created in the United States than anywhere else on the entire globe.  89 percent is made in the U.S.A. and only 11 percent is made in the rest of the world.

#16 The United States has the largest trade deficit in the world every single year.  Between December 2000 and December 2010, the United States ran a total trade deficit of 6.1 trillion dollars with the rest of the world, and the U.S. has had a negative trade balance every single year since 1976.

#17 The United States spends 7 times more on the military than any other nation on the planet does.  In fact, U.S. military spending is greater than the military spending of China, Russia, Japan, India, and the rest of NATO combined.

#18 The United States has far more foreign military bases than any other country does.

#19 The United States has the most complicated tax system in the entire world.

#20 The U.S. has accumulated the biggest national debt that the world has ever seen and it is rapidly getting worse.  Right now, U.S. government debt is expanding at a rate of $40,000 per second.

So are you convinced that we are in trouble yet?

The truth is that America has changed.  Most of us don’t even say hello to our neighbors anymore.

MachoMan's picture

holy crap those things keep going up in price...  If someone is going to go this route, I would suggest trying to pick up an sks variant that accepts AK mags from the factory...  

High Plains Drifter's picture

yeh you used to see them for about a hundred bucks, but i think aim got ahod of some nice ones and they don't want to give them away.

WaterWings's picture

Since I can only fire one rifle (accurately) at a time I have decided to spend a lot more than that to protect MY ONE LIFE.

Sell what you must.

Clark Bent's picture

Those are fine choices. I think the best handgun I have laid hands on is

WaterWings's picture

Which is great if you also have the CX4.

I should have been more specific with the above link:


Doyle Hargraves's picture

Another plus to the 7.62x39 is most of the foreign troops that come to collect what they are owed use that particular load. Will make it easier to "acquire" ammo...probably wouldn't hurt to get one of these



Lednbrass's picture

Not many real militaries geared off of Soviet weaponry use this round anymore, they went to the 5.45X39 with the AK 74 30 some years ago.  Only MENA nations still seem to use it.

I used to have a GP100 that I had to sell soon after I became a parent, it is a nice pistol.

High Plains Drifter's picture

when they were in chechnya , they had problems with that round. it would bounce off of leaves and twigs etc real easy. so many of them changed back to the 7.62 x 39mm rifles.

Fukushima Sam's picture

Given that logic you don't even need that gun now.  Just get any old gun and then when the time comes you can "acquire" the gun you need, as well as the ammo in it.

Doyle Hargraves's picture

You sound like my Dad, Sam. He says the same thing, why buy high cap semi-autos when you can just dust off one of the enemy and take their fully automatic and ammo from em.

Lednbrass's picture

A very good and reliable weapon that will take abuse and still go bang.  Not great at distance but effective out to 200 yards or so and relatively inexpensive.  Good choice for limited budgets.

High Plains Drifter's picture

agreed. just like a old green beret i listen to said one time. it is a falsehood to think that we will all be snipers hiding out and shooting from long distances. he said, that almost all of your action will be within a hundred yards or less

Doyle Hargraves's picture

Very true statement...for that kind of engagement I trust my mini 14...can hit anything up to 3-400 yards spot on. SKS, AK is very durable but lacks the accuracy. If I am out at long distances I will take a Garand over everything else out there, little recoil, heavy barreled for accuracy and .308 it is about the best round there is for long distances (barrett arms are pretty much outlawed here, of course if it came down to using these for what they are for I doubt there would be too many 'laws' being enforced anyway).

Lednbrass's picture

A very good and reliable weapon that will take abuse and still go bang.  Not great at distance but effective out to 200 yards or so and relatively inexpensive.  Good choice for limited budgets.

Lednbrass's picture

A very good and reliable weapon that will take abuse and still go bang.  Not great at distance but effective out to 200 yards or so and relatively inexpensive.  Good choice for limited budgets.

Lednbrass's picture

A very good and reliable weapon that will take abuse and still go bang.  Not great at distance but effective out to 200 yards or so and relatively inexpensive.  Good choice for limited budgets.

Lednbrass's picture

A very good and reliable weapon that will take abuse and still go bang.  Not great at distance but effective out to 200 yards or so and relatively inexpensive.  Good choice for limited budgets.

Lednbrass's picture

A very good and reliable weapon that will take abuse and still go bang.  Not great at distance but effective out to 200 yards or so and relatively inexpensive.  Good choice for limited budgets.