The national debt for the U.S. federal government now sits at over $17 trillion.
This news has been getting more attention lately, particularly with the debates on the debt ceiling…
Unfortunately, this number does not tell us a lot in regards to the true fiscal situation of the U.S. government.
This $17 trillion (and growing) of debt represents money that has been borrowed through issuing bonds and Treasuries with varying lengths of maturity. The lenders include other U.S. government agencies, private investors, and foreign governments/central banks.
Bottom line: The U.S. government owes a lot of money to a number of different people and entities.
And the scary truth is our national debt is actually low in comparison to the unfunded liabilities…
Unfunded liabilities are estimated at anywhere from about $50 trillion to over $200 trillion. These are promises that have been made that have not been funded — and cannot be covered with projected government tax collections.
If you see the term “fiscal gap,” this is what the unfunded liabilities represent: It is the gap between what the U.S. government is expected to collect and what the U.S. government is expected to pay out in so-called benefits.
Social Security and Medicare make up the largest portion of the unfunded liabilities. In fact, Medicare is by far the largest, and this is as medical care costs continue to rise significantly. Also included in the unfunded liabilities would be pensions for people who worked for the government.
Statistical Reality
Now, don’t shoot the messenger, but…
The truth is there is no possible way for the government to make good on all of its promises at this point.
It doesn’t matter whether you think Medicare and Social Security should not exist, or whether you think they are the greatest government programs ever…
The statistical reality is that the government will have to change the rules at some point. It will be impossible for future politicians to keep the promises that were made in the past. While most estimates of the unfunded liabilities are around $50 trillion, the seemingly more reliable ones are more in the ballpark of $200 trillion.
Of course, there are a lot of variables (how long people will live, how fast medical costs rise, the strength of the economy, etc.).
And if the economy hits a bad recession — and economic growth falls short of the projections — the fiscal gap will be that much greater.
If you can’t fathom just how much $200 trillion is, don’t feel bad. You’re not alone. In fact, I don’t think anyone really understands how much money this is.
I’ll attempt to give you some perspective with this statistic: The entire yearly GDP of the U.S. economy is just under $17 trillion.
Options (Kind Of)
While some think there are several options for dealing with this problem, the truth is there aren’t many at all.
Some will say that taxes can be raised to make up some of the difference. Even if the American people let it happen, raising taxes would only serve to further stifle economic growth. Increased taxes do not always lead to an increase in tax collections by the government, particularly if it hurts economic growth and encourages people to avoid taxes (legally or illegally).
Another option is to cut other government spending. While this doesn’t even seem possible right now, I think there will come a day when we will actually see a cut in spending. If the American people are given a choice between cutting Social Security and cutting spending on things such as foreign aid… well, I think we all know what they’ll vote for.
And even if the rest of the entire federal budget were cut to zero — except the interest payments on the debt and the so-called entitlement programs — this would likely still not solve the problem, even with tax rates staying the same.
Of course, we know the federal budget would never be cut to zero.
Hyperinflation Nation
Another option often presented for dealing with the unfunded liabilities is having the government (through the Federal Reserve) resort to inflation.
I believe this is already happening — and will probably continue to happen…
The government will likely try to change the rules on calculating the cost-of-living increase for Social Security.
For retirees in the future, you may get a cost-of-living increase of, let’s say, 3%, while the actual inflation rate may be running at 6%. In this instance, you would be taking a yearly reduction of 3% in real terms.
Some suggest the government may even resort to hyperinflation to solve the problems of debt and unfunded liabilities. And while this could work for the national debt, it does not work for Social Security and Medicare. Hyperinflation would result in the cost of medical care rising with everything else, so the government would have to pay out that much more for Medicare.
And if you think that the government can just cut payments to doctors and hospitals, well… that would only drive doctors out of the business, thus reducing the supply of medical care available.
Default is Coming
There is going to be a default of some kind. It is inevitable.
It will not come all at once; instead, it will happen in steps as the problems become more evident and the system becomes more unsustainable.
The first set of defaults will be minor tweaks, though they may not seem “minor” to some people. The government will probably change its calculation of the cost-of-living increases for Social Security as mentioned above. It will also resort to what is called means testing, wherein wealthy and high-income individuals are not given entitlement benefits, even though they paid in as much or more as everyone else.
Sadly, these small steps will not even make a dent in the fiscal gap.
As a result, we will eventually see significant increases in the official retirement age. With the baby boomer generation starting to retire now, this is virtually inevitable.
What to Expect
If you are currently under the age of 50, you should not expect any government retirement benefits until at least the age of 75, if at all.
If you are going to retire before then, it will only be because you saved enough money on your own and were able to protect it.
If you are already collecting Medicare and Social Security, or close to it, I would not expect the rug to be pulled out from under you, at least not directly…
You should keep seeing checks for Social Security; but you will find they probably won’t buy as much as time goes on. Don’t ignore inflation, even if it is subtle. A loss of 2% or 3% per year adds up quickly over the course of five or 10 years.
If you are between ages 50 and 60 right now, it is a little harder to know what to expect. My guess is that things will start to fall apart in the next five years, and the government will have to start raising the retirement age.
Then again, the government is able to kick the can down the road for a little longer than we ever thought possible.
Icing on the Cake
The biggest takeaway from all of this is that you should not rely on the government for anything.
Many Americans will find themselves in a difficult situation because they bought into promises made by politicians, who were just trying to get votes.
If you are planning to retire, do so with no consideration to Medicare and Social Security. And if you end up collecting, look at it this additional income as icing on the cake.
The same goes for those with government pensions: I don’t know that there will be an outright default, but anything is possible at this point. At the very least, you should expect to be paid in depreciating dollars. Your monthly check will buy less as time goes on.
If you are currently in retirement, your number one threat is inflation, particularly if you are on a fixed income. The Federal Reserve’s current policy of quantitative easing (monetary inflation) is not good for you. You need to invest in vehicles that will hedge against significant inflation.
A Series of Steps
The government has created a mess by making promises that it simply cannot deliver. It has fostered a dependency from American citizens and, as a result, it will be painful when the government has to default on many of its promises.
If you were planning on relying on government checks for your retirement, you may want to reconsider your plans…
You should also consider taking the appropriate precautionary measures, some of which can be found here.
Until next time,
Geoffrey Pike for Wealth Daily
