America Default on its Obligations?

It is not an issue of whether the American government “will” default, or even “when” it will default, the question is “how” it will default.

Americans have a looming obligated deficit of $63.6 trillion—which is more four times our total production (USA Gross Domestic Product-GDP; $14.58 trillion) is the largest single debt in world’s history. The two largest federal spending obligations are Social Security and Medicare with Medicare being the 5 times larger then Social Security. As of 2009, the obligation for Social Security alone is $7.6 trillion while Medicare is $38.1 trillion.

We euphemistically refer to Social Security and Medicare, as a “pay-as-you-go” system. This means that money that we pay today goes to support the benefits of today’s retirees. Any surplus is spent by Congress which provides treasury special issue bonds—bonds only in name since they cannot be sold or exchanged. The 2009 Social Security Trustees Report states that: "Neither the redemption of trust fund bonds, nor interest paid on those bonds, provides any new net income to the Treasury, which must finance redemptions and interest payments through some combination of increased taxation, reductions in other government spending, or additional borrowing from the public." This means that these are not funds or bonds that could be sold, since to pay this money back the government will have to raise, borrow, print additional monies to honor them.

Unlike other countries that invested some or most of their surplus, the U.S. government spends all of it.  For the past 40 years Congress has not had the ability stay within budget (apart from 1999 and 2000), it is unlikely that it is capable of balancing the budget and reduce spending enough to pay back four times our GDP to the Social Security Fund (including Title XVIII Medicare.) More telling is that there is no budget plan by Congress to ever do so.

The sad part of this story is that we have known this for at least three decades with the 1982 Greenspan Commission. With a major payroll tax hike to generate Social Security surpluses for the next 30 years, the strategy was to build up a large reserve in the trust fund that could be drawn when the boomers become retirees. The Budget Enforcement Act—Section 13301—made it illegal for Congress to use Social Security funds by excluding Social Security from all budgets including the congressional budget. However the intent of the law is ignored.

Medicare by far is the largest federal obligation, and despite consuming nearly 20 percent of our GDP (by 2016), twice that of Switzerland, Germany and France we still have 46.6 million Americans uninsured. In addition, for those Americans lucky enough to have insurance, these dollars do not translate to better health. The United States continues to slide further behind other countries in health status. In 1997, the U.S. ranked 15th in mortality. Since then, Finland, Portugal, the United Kingdom and Ireland have reduced their mortality rates from diseases that can be cured more rapidly than the United States. Similarly disappointing are results of child well-being, in which the U.S. ranked second to last when compared to 21 similar countries.

It is not an issue of whether the American government will default, it has to: or even when it will default, it will happen when the next round Congress does not pass a law allowing it to borrow more to pay off its debts; the question is how it will default.

Section 4 of the Fourteenth Amendment, declaring that "The validity of the public debt of the United States, authorized by law, . . . shall not be questioned," embraces whatever concerns the integrity of the public obligations such as Social Security (P. 294 U. S. 354.) And it is also a perceived political deal breaker, a third rail. Social Security can easily be modified to address perceived obligation simply by adopting the Medicare formula of taxing all income without any ceiling. And that will likely happen.

Medicare is the real issue. Administering Medicare is six times more expensive than health care systems in Europe, while nearly a third of all Medicare dollars are spent on moribund (dying) patients in the last two years of life. The solution needs to address both these issues. The government will need to harness Medicare (and title XIX Medicaid) through a comprehensive health care system. First will come the default on services, and the slip sliding of our health. The “how” is  health of older adults which will continue to deteriorate until there is enough political will to adopt a more equitable and efficient system of health care delivery. Single payer, managed care, with rights and dignity of dying.