Even if you believe the U.S. should be running big deficits right now to stimulate growth, as I do, it is easy to grow deeply disturbed by projections of rising interest payments on the national debt in the coming years.
As I have noted here, the Treasury will start shelling out more for interest on the debt than all domestic discretionary spending combined in 2015 and from then on, the gap widens quickly. In 2022, under Obama's budget plan, the United States will spend about twice as much on interest as on all domestic discretionary spending -- $850 billion on interest, $430 billion on domestic programs. Interest payments as a percent of GDP will roughly double.
The Federal government will be paying out far more money to its creditors, including China and Japan (foreigners own about a third of U.S. government debt), than it invests in things like scientific research, education, green technology, and infrastructure. That's a recipe for national decline. Which is why we need a lot more revenue and much bigger defense cuts in coming years than are now on the table.
Yet there is a silver lining to these ominous debt figures. Which is that a good chunk of future interest payments will be made to Social Security beneficiaries (and a lesser amount will go for Medicare payments.) So, yes, we'll be spending a murderous amount on interest payments, but some portion of that rise should be seen merely as increased spending on senior entitlements.
Let's look at the details more closely.
As of today, the United States government has $16.4 trillion in debt. Of that amount. $4.6 trillion is in the form of "intragovernment debt" -- that is, money that the Treasury has borrowed from other parts of the government over the years.
A big share of such borrowing has been from the Social Security trust funds, and to a lesser extent, the Medicare trust funds. As of 2011, 57 percent of intragovernment debt was held by the Social Security trust funds.
We hear a lot about all the money piled up in the Social Security trust funds (around $2.7 trillion) and how the Social Security Administration will draw down that money in the coming years until the trust funds are "exhausted" in 2035 or so, leaving Social Security with annual shortfalls unless reforms are made.
But I have some bad news for people who haven't been paying attention to public finance over the past few decades: There is, in fact, no secret pile of money stashed away by the U.S. government that is slated for Social Security and untouched. Instead, pretty much all the surpluses generated by Social Security during its many flush years were promptly borrowed by the Treasury and spent by the Federal government. So what's really sitting in those trust funds are a bunch of IOUs in the form of special non-marketable government securities that the Treasury pays interest on and eventually must redeem. As the Center for Budget and Policy Priorities explained in a 2010 brief:
When Social Security needs to start cashing in its holdings of Treasury securities to meet its benefit obligations, the federal government will have to increase its borrowing from the public, or raise taxes or spend less.
Progressives like to say that Social Security only needs minor fixes and doesn't contribute to the deficit. Well, yes and no. The trust funds do have a surplus and Social Security will be in fine shape for nearly two decades to come. With a few tweaks, like raising the payroll tax cap, that solvency could be extended for 75 years.
But just remember what's happening when Social Security draws on the trust funds: The federal government is making interest payments. And the retirement of the Boomers is one reason why interest payments will jump to over $700 billion a year by 2021 -- and, all told, the federal government will spend nearly $6 trillion on interest over the next decade. A lot of this money -- although it's hard to tell how much -- will be going out as the Social Security trust funds redeem Treasury securities.
All this is one more reason to regret that Al Gore (with his "lockbox" plan) wasn't able to take office in 2001.
Clearly, Social Security's financial shortfall do contribute somewhat to the long-term deficit problem as shortfalls in the trust fund require redemption of securities and outlays of federal money. If Social Security could bring in more tax revenue or reduce benefit outlays over the next decade, and didn't have to redeem as many Treasury securities, the federal government would pay out less in interest, which would reduce deficits.
But back to my original point: Which is that it sure feels better to know that some slice of those yucky interest payments on the national debt will be going straight into the pockets of American seniors. In effect, we are going to be dramatically raising outlays to Social Security in the coming years, only we'll be calling this spending "interest."
Yes, I wish we'd done the lockbox plan. But paying out more as the Boomers retire doesn't seem like such a big deal to me -- or a bad thing.