Submitted by Charles Hugh Smith from Of Two Minds [5]
Have We Reached Peak Entitlements?
There is no way an economy that grows by 75% every 25 years can fund entitlement programs expanding by 500% or more over the same time period.
One aspect of Peak Government is Peak Entitlements: the ability of the government to fund its social program promises out of current tax revenues. Recall that Federal entitlement programs--Social Security, Medicare and Medicaid, to mention the largest--are all "pay as you go," meaning they are funded out of current tax revenues.
The Social Security and Medicare "trust funds" are politically useful illusions: as the securities within the so-called trust funds are non-marketable, the government funds shortfalls in these programs the same way it funds all its other deficit spending, by selling Treasury bonds.
As the charts in Have We Reached Peak Government [6]? show, government spending has soared to levels that no longer reflect the growth of the real economy. Government spending has risen by 300% or more since 1990, while the economy has grown by 75% in that time.
GDP:
Federal spending:
Let's zero in on entitlement program spending. Personal Current Transfer Receipts (PCTR) include all transfer payments to individuals, a category that includes all social welfare programs such as Social Security, Medicare and Medicaid.
Social Security:
Medicaid:
Medicare:
Since Social Security and Medicare are funded by payroll taxes (15.3% of all earnings paid by employers and employees, up to $113,700, and another .9% on earned income above $200,000 annually) and the majority of individual income taxes are also derived from earned income, the key metrics behind entitlement tax revenues are full-time employment and productivity: the number of people who are paying substantial payroll taxes and the productivity of the economy, i.e. the ability of the economy to support more workers and higher wages.
Full-time employment and the number of Social Security beneficiaries:
Output per person:
Clearly, full-time employment is stagnating while the number of entitlement beneficiaries is climbing steadily as the baby Boomers retire en masse. At the same time productivity since 1990 has advanced 58%, a pace that cannot support program costs rising by 500% over the same time frame.
If we are not yet at Peak Entitlements, we are getting close. Short of the Federal Reserve printing $1 trillion a year and distributing it to entitlement beneficiaries directly (with all the unintended consequences of such blatant money-printing), there is no way an economy with stagnant employment and modest productivity growth (roughly 60% in 25 years) can fund entitlement programs expanding by 500% or more over the same time period.