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Crossing the United States Policy Void

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The United States of America is in the midst of an enormous demographic and economic transformation; effects are witnessed through decreased labor force participation, stagnant economic growth, and financially strained government programs. Layered within the demographic change is a system morphed through partisan interests and inequitable assumptions. The country’s social insurance programs perpetuate on guarantees that supporters receive similar benefits as needed. Academics and government officials have warned of the coming population wave for decades, yet little action has been taken to mitigate associated problems.

Safety nets are critical for developed nations to maintain minimum living standards and some forms are sustainable. U.S. social insurance programs are underfunded by $39.698 trillion dollars, net of assets and future tax revenue, if continued under the current structure. The following research is provided to raise awareness of the existing system’s insolvency, generational inequity, and long-term costs in hope of instigating the necessary discussion of realigning economic, fiscal, and social policies onto a sustainable trajectory.

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Crossing the United States Policy Void

  1. 1.     Crossing  the  U.S.  Policy  Void∗         Aaron  M.  Careaga+     This  Draft:  December  16,  2014             Abstract       The  United  States  of  America  is  in  the  midst  of  an  enormous  demographic  and  economic  transformation;   effects   are   witnessed   through   decreased   labor   force   participation,   stagnant   economic   growth,   and   financially  strained  government  programs.  Layered  within  the  demographic  change  is  a  system  morphed   through   partisan   interests   and   inequitable   assumptions.   The   country’s   social   insurance   programs   perpetuate  on  guarantees  that  supporters  receive  similar  benefits  as  needed.  Academics  and  government   officials   have   warned   of   the   coming   population   wave   for   decades,   yet   little   action   has   been   taken   to   mitigate  associated  problems.       Safety  nets  are  critical  for  developed  nations  to  maintain  minimum  living  standards  and  some  forms  are   sustainable.  U.S.  social  insurance  programs  are  underfunded  by  $39.698  trillion  dollars,  net  of  assets  and   future  tax  revenue,  if  continued  under  the  current  structure.  The  following  research  is  provided  to  raise   awareness   of   the   existing   system’s   insolvency,   generational   inequity,   and   long-­‐term   costs   in   hope   of   instigating  the  necessary  discussion  of  realigning  economic,  fiscal,  and  social  policies  onto  a  sustainable   trajectory.       Keywords:  Social  Insurance;  Aging  Demographics;  United  States;  Fiscal  Policy;  Entitlements;  Health  Care;   Education;  Military;  Infrastructure;  Behavioral  Economics                                                                                                                   ∗ The  views  and  opinions  expressed  in  this  article  are  those  of  the  author  only,  and  do  not  necessarily  represent  the  views  and   opinions  of  WealthMark  LLC.,  or  any  of  their  affiliates  and  employees.  The  author  makes  no  representation  or  warranty,  either   expressed  or  implied,  as  to  the  accuracy  or  completeness  of  the  information  contained  in  this  article,  nor  is  he  recommending  that   this  article  serve  as  the  basis  for  any  investment  decision—this  article  is  for  information  purposes  only.  I  want  to  thank  Benjamin   Esget  and  Asche  Rider  for  helpful  comments  and  discussion.   + Research  Analyst,  WealthMark  LLC,  1329  North  State  Street,  Suite  206,  Bellingham,  WA  98225-­‐9998,  aaron@wealthmarkllc.com   (email).    
  2. 2.  1   Contents     Introduction:  The  Perfect  Storm     o 1.1  Background   o 1.2  Demographics   o 1.3  Fiscal  Environment      2     3   6   10   Structural  Effects     o 2.1  Social  Risks   o National  Defense   o Education   o Health  Care   o Infrastructure   o Social  Welfare   o 2.2  Economic  Risks   o Global  Reserve  Currency   o Capital  Markets   o Consumer  Economic   o Foreign  Direct  Investment   o 2.3  Vested  Interests     17     17   18   19   20   21   22     24   25   27   28   30   Accountability     o 3.1  Social  Policy   o 3.2  Economic  Policy   o 3.3  Tax  Policy   o 3.4  Retirement  Policy     32     32   36   39   42   Resolution     o 4.1  Realigning  Incentives   o 4.2  Crossing  the  Void   o Structural  Reforms   o Support  Growth  Drivers   o Returning  to  the  Roots:  Commonwealth  Mentality     45     46   48   48   52   54   Conclusion:  Starting  the  Journey   56     Appendix   58      
  3. 3.  2   1.  Introduction:  The  Perfect  Storm     “Those  who  cannot  remember  the  past  are  condemned  to  repeat  it.”  –  Santayana     Social  insurance  programs  are  necessary  pillars  of  modern  society  that  not  only  benefit  recipients,   but  also  the  population  at  large.  Governments  use  these  systems  as  a  throttle  to  mitigate  poverty   and  influence  minimum  living  standards  by  providing  a  safety  net  to  those  who  otherwise  cannot   support  themselves  financially.  At  a  national  level,  it  is  the  responsibility  of  elected  officials  to   allocate  tax  revenue  and  manage  these  programs  in  a  sustainable  manner.  Social  insurance   programs  in  the  United  States  include  Social  Security,  Medicare,  Medicaid,  Veterans   Administration,  federal  employee  and  military  retirement  plans,  unemployment  compensation,   food  stamps,  and  agricultural  related  programs.1  These  are  funded  through  tax  revenue  and   perpetuate  on  the  guarantee  that  contributors  receive  similar  benefits  as  they  qualify.       Changes  in  population  size  across  generations  greatly  influence  a  country’s  overall  productivity   and  social  demands.  When  a  large  percent  of  the  population  is  younger,  healthier,  and  working,   there  is  a  significant  tax  base  to  draw  from  with  lower  demand  on  social  insurance  programs.   When  population  size  fluctuates  between  cohorts  and  relatively  more  individuals  draw  from  the   system,  benefits  can  only  be  funded  through  other  means.  Governments  can  either  increase  tax   rates  to  generate  more  revenue  or  redirect  funds  from  other  programs  and  finance  the  shortfalls   through  deficits,  indirectly  borrowing  money  to  bridge  the  gap.     Increased  borrowing  and  higher  taxes  are  necessary  to  sustain  government  programs  and  social   insurance  benefit  levels  as  entitlement  demand  grows.  This  reality  not  only  favors  older   generations  who  paid  relatively  lower  tax  rates  in  higher  growth  periods  but  leaves  unfunded   legacy  obligations  to  current  and  future  generations  and  further  disincentives  personal  and   professional  growth.       Total  costs  of  U.S.  social  insurance  programs  extend  far  beyond  unfunded  benefit  obligations.   Increasing  tax  rates  or  cutting  benefits  can  be  quantified  with  reasonable  accuracy.  The  economic   drag  from  diverting  discretionary  funding  to  mandatory  programs  inhibits  maintenance  and   improvements  to  fundamental  systems.  Losses  in  economic  competiveness,  deteriorating   infrastructure,  a  failing  education  system,  the  polarization  of  politics,  and  many  other  issues  are  all   indirect  costs.  Even  though  not  all  of  these  can  be  quantified,  evidence  of  the  effects  is  visible   today.  Running  deficits  to  finance  shortfalls  will  continue  to  exacerbate  government  programs  as   compounding  debt  grows  exponentially.       Political  choices  will  also  become  harder  as  the  tug  of  war  between  discretionary  and  non-­‐ discretionary  programs  sculpts  the  future  of  the  country.  Warning  signs  have  sounded  for  decades   but  election  cycles  leave  policy  makers  with  little  courage  to  take  action  or  even  convey  the   severity  to  the  masses.  Remedies  will  not  happen  overnight,  but  action  taken  now  will  prevent   current  and  future  generations  from  major  heartache.     The  following  research  explores  the  historical  foundations  of  social  insurance  programs  to   provide  an  understanding  of  original  structures  and  their  modern  adaptations.  After  this                                                                                                                   1  Auburn  University.  “A  Glossary  of  Political  Economy  Terms:  Entitlement  Program.”  Accessed  June  12,  2014.   http://www.auburn.edu/~johnspm/gloss/entitlement_program.  
  4. 4.  3   background,  fiscal  imbalances  and  political  and  social  drivers  stemming  from  these  programs  will   become  apparent  and  lead  to  a  discussion  of  current  and  forecasted  long-­‐term  effects.  The  scope   of  research  centers  on  the  United  States,  but  successful  and  flawed  international  systems  will  be   examined  to  discover  strengths,  weaknesses,  and  potential  improvements.  In  conclusion,  points  of   resolution  and  courses  of  action  that  can  be  taken  to  realign  the  country’s  unsustainable  fiscal  and   political  trajectory  will  be  reviewed.   1.1  Background   pen·sion·er  (noun)  pen(t)-­‐sh(əә-­‐)nəәr   A  15th  century  word  defined  by  Merriam  Webster  as  a  person  who  receives  or  lives  on  a  pension;   especially:  a  person  who  receives  a  government  pension.  Origins  trace  to  mid  1600  German   widows’  and  teachers’  funds,  established  in  good  faith  to  protect  those  who  could  not  support   themselves.  These  eventually  grew  into  funds  for  veterans,  elderly,  poor,  and  disabled  citizens   who  otherwise  didn’t  have  a  safety  net  to  insulate  against  adverse  financial  shocks.     Individuals  often  supported  each  other  by  living  in  extended  families  and  working  in  agriculture   or  other  craftsmen-­‐type  jobs  prior  to  the  industrial  revolution.  This  structure  began  to  shift  as   new  economic  demands  drove  jobs  to  factories  and  populations  to  major  cities.  Higher  density   societies  demanded  better  health  care  and  public  services  that,  amongst  other  reasons,  drastically   increased  life  expectancies.  The  U.S.  population  age  65  years  and  older  was  over  seven  times   larger  in  1940  relative  to  the  older  group  in  1870,  an  increase  from  1.15  million  to  9.02  million   people.2  Increases  in  longevity  and  population  size  have  supported  the  growth  of  economic  and   government  structures  that  attempt  to  better  mediate  social  demands.   Although  limited  military  pensions  were  started  in  the  late  17th  century  by  English  colonies  in  the   United  States,  widespread  universal  social  insurance  was  not  formed  until  the  early  20th  century.3   The  earliest  pension  programs  were  for  disabled  settlers  who  fought  Native  Americans.  The   country’s  first  pension  law  was  enacted  during  the  American  Revolution  to  promote  military   enlistment,  with  benefits  paid  by  each  state  until  the  U.S.  Constitution  was  put  into  effect  in  1778.     The  Pension  Act  of  1818  reshaped  military  safety  nets  by  extending  coverage  to  all  service   members,  not  only  the  disabled,  and  bestowed  lifetime  benefits.  Various  other  legislation   extended  coverage  and  benefits  to  military  members  and  their  families  throughout  the  Mexican,   Civil,  Indian,  Spanish  American  Wars  and  World  War  I.  But  nonmilitary  citizens  could  not  access   widespread  federal  safety  nets  until  the  1930s.     Everything  changed  when  the  Great  Depression  left  millions  unemployed,  homeless,  and  hungry,   encouraging  both  individuals  and  governments  to  institute  national  programs  that  assured   minimum  levels  of  living  standards.  President  Franklin  D.  Roosevelt  signed  the  Social  Security  Act   into  law  in  1935,  creating  the  Social  Security  Board  that  encompasses  seven  programs.  These   programs  include  old-­‐age  assistance,  federal  old-­‐age  benefits,  unemployment  insurance,  aid  to   dependent  children,  grants  to  states  for  maternal  and  child  welfare,  public  health  work,  and  aid  to   the  blind.  Its  structure  was  established  independent  from  other  government  agencies,  but                                                                                                                   2  U.S.  Census  Bureau.  “Historical  Statistics  of  the  United  States:  Colonial  Times  to  1957,  part  1,  series  A  199–134,  p.  15.”   3  U.S.  Department  of  Veterans  Affairs.  “Military  Pension  History.”  Accessed  June  12,  2014.   http://www.va.gov/opa/publications/archives/docs/history_in_brief.pdf.  
  5. 5.  4   transitioned  into  a  sub-­‐cabinet  agency  in  1939  and  then  regained  independence  in  1995.4  In   description  of  the  Social  Security  Act,  President  Roosevelt  stated  that,  “We  can  never  insure  one   hundred  percent  of  the  population  against  one  hundred  percent  of  the  hazards  and  vicissitudes  of   life,  but  we  have  tried  to  frame  a  law  which  will  give  some  measure  of  protection  to  the  average   citizen  and  to  his  family  against  the  loss  of  a  job  and  against  poverty-­‐ridden  old  age.”  Sustainability   of  this  goal  has  become  questionable  due  to  growing  imbalances  across  program  structures.   Largely  maintained  through  a  payroll  tax  on  the  working  population,  those  who  pay  into  the  fund   are  entitled  to  receive  benefits  after  defined  thresholds  are  met.  Significant  portions  of  Americans   were  excluded  from  social  security  from  the  start.  Minorities,  government  employees,  self-­‐ employed  individuals,  and  those  in  low  and  inconsistent  wage  jobs,  or  who  otherwise  had   employer-­‐based  pensions,  were  excluded.  Most  of  the  unqualified  persons  gained  eligibility  to   participate  as  social  insurance  programs  grew.   Social  Security  was  intended  to  be  a  self-­‐sustaining  advance  funded  system,  but  immediately   transitioned  towards  a  pay  as  you  go  program.  Although  current  policy  is  not  a  pure  budget   neutral  pay  as  you  go  system,  changing  the  structure  allowed  elected  officials  immediate  political   support  by  diverting  funds  earmarked  for  future  retirees  into  current  initiatives  as  they  saw  fit.  An   advance  funded  system  works  like  a  national  savings  account  where  money  deposited  is  only   withdrawn  for  its  intended  purpose.5  Rather,  the  pay  as  you  go  system  lies  at  the  other  end  of  the   spectrum  by  using  current  tax  dollars  to  pay  obligations  on  a  revolving  basis.  With  even  the   slightest  interruption  in  tax  collection  or  miscalculation  of  benefit  levels  the  system  no  longer   balances.   These  programs  were  developed  with  good  intention,  but  held  serious  structural  flaws  that   Government  officials  recognized  from  the  start  based  on  failed  international  systems.  On   November  27,  1944,  Chairman  Arthur  J.  Altmeyer  of  the  Social  Security  Board  warned  the  House   Ways  and  Means  Committee:   In  this  country  we  are  still  in  a  position  to  avoid  these  mistakes  by  getting  clearly   established  now  that  if  our  people  want  social  insurance  they  must  be  willing  to  pay  for  it.   The  time  to  obtain  the  necessary  contributions  is  when  people  are  able  to  pay  for  the   insurance  and  are  willing  to  pay  for  it  because  they  can  be  shown  that  they  are  getting  their   money's  worth.  If  we  should  let  a  situation  develop  whereby  it  eventually  becomes   necessary  to  charge  future  beneficiaries  rates  in  excess  of  the  actuarial  cost  of  the   protection  afforded  them,  we  would  be  guilty  of  gross  inequity  and  gross  financial   mismanagement,  bound  to  imperil  our  social  insurance  system.   Initiating  a  transfer  payment  scheme  with  workers  varying  in  age  and  taxable  income,  and  elder   cohorts  who  never  paid  but  already  qualify  for  benefits,  is  difficult  because  one  cohort  typically   gains  and  policy  adjustments  are  inevitable.  The  social  security  payroll  tax  rate  was  initially  set  at   two  percent  and  was  to  be  split  equally  between  the  employee  and  employer.  The  rate  was   originally  scheduled  to  increase  one  percent  every  three  years  until  it  reached  six  percent  in  1949,   but  Congress  enacted  legislation  preventing  the  increase  until  1960.6  The  following  table  displays                                                                                                                   4  U.S.  Social  Security  Administration.  “Development  of  Social  Security  in  America.”  Accessed  June  17,  2014.   http://www.ssa.gov/policy/docs/ssb/v70n3/v70n3p1.html.   5  Ibid   6  Congressional  Research  Service.  “Summary  of  Major  Changes  in  the  Social  Security  Cash  Benefits  Program:  1935-­‐1996.”  Accessed  June  18,  2014.   http://www.ssa.gov/history/pdf/crs9436.pdf.  
  6. 6.  5   the  varying  tax  rates  across  decades  for  Social  Security's  Old  Age,  Survivors,  and  Disability   Insurance  (OASDI)  program  and  the  Medicare's  Hospital  Insurance  (HI)  program.     *Employer  &  Employee  Combined  Rate     Source:  U.S.  Social  Security  Administration     Tax  rates  are  only  one  variable  in  the  program’s  revenue  equation  as  the  Social  Security   Administration  also  defines  limits  on  the  amount  of  earnings  to  be  taxed.  The  maximum  amount   adjusts  based  on  the  national  average  wage  index,  the  most  recent  average  being  $44,321.67  in   2012.  Ignoring  inconsistencies  in  growth  rates  between  the  national  average  wage  index  and  real   median  household  income  reported  by  the  U.S.  Census  Bureau,  earnings  limits  are  set  for  the   social  security  (OASDI)  payroll  tax.  The  Medicare  (HI)  program  followed  a  similar  structure  until   1993  when  taxable  limits  were  removed.  For  example,  an  individual  earning  $50,000  a  year  in   2014  pays  a  combined  $6,200  in  social  security  tax  and  $1,450  in  Medicare  tax  per  year.     Source:  U.S.  Social  Security  Administration     Earlier  generations  were  subject  to  inconsistently  favorable  taxation  both  in  tax  rate  and  earnings   limit  terms,  which  has  led  to  a  significant  underfunding  of  program  reserves  and  a  mismatch  in   benefit  obligations.  As  Arthur  Altemeyer  recognized  in  the  1940s,  a  sustainable  transfer  payment   scheme  taxes  individuals  while  they  are  still  working  by  matching  current  rates  and  earnings   limits  with  future  benefit  obligations.  For  social  insurance  programs  to  remain  solvent,  funding   assets  and  equity  held  need  to  be  greater  than  or  equal  to  the  liabilities  paid.     As  with  individual  budgets,  federal  finances  must  also  balance:   Year OASDI HI Total OASDI HI Total 1940 2.00% - 2.00% - - - 1950 3.00% - 3.00% - - - 1960 6.00% - 6.00% 4.50% - 4.50% 1970 8.40% 1.20% 9.60% 6.30% 0.60% 6.90% 1980 10.16% 2.10% 12.26% 7.05% 1.05% 8.10% 1990 - Today 12.40% 2.90% 15.30% 12.40% 2.90% 15.30% Employer & Employee Self-Employed Social Insurance Payroll Tax Rate History $0# $20,000# $40,000# $60,000# $80,000# $100,000# $120,000# 1937-50#1955-58#1966-67# 1972# 1974# 1976# 1978# 1980# 1982# 1984# 1986# 1988# 1990# 1992# 1994# 1996# 1998# 2000# 2002# 2004# 2006# 2008# 2010# 2012# 2014# !Earnings!Limit! Year! OASDI!Contribu7on!and!Benefit!Base!
  7. 7.  6   Assets  =  Liabilities  +  Equity   Assets  generated  in  the  form  of  tax  revenue  significantly  outpaced  benefit  obligations  leading  to   fiat  equity  reserves  in  the  early  days  of  the  system.  Aging  demographics,  rising  health  care  costs,   benefit  adjustments,  and  decreased  labor  force  participation  (resulting  in  a  lower  taxable  base)   are  driving  program  imbalances  between  revenue  and  obligations  to  unsustainable  levels.  U.S.   financial  accounts  cannot  withstand  the  increases  in  debt  levels  necessary  to  indirectly  cover  the   gap  in  revenue,  nor  can  payroll  taxes  be  raised  beyond  levels  that  disincentives  the  country’s   economic  engine.  An  unbiased  review  of  the  facts  is  critical  to  establish  national  priorities.   1.2  Demographics   Modern  societies  are  continuing  to  learn  how  to  sustain  population  levels  that  have  never  been   seen  before  and  which  are  living  much  longer.  Global  population  is  expected  to  plateau  around  10   billion  people  as  birth  and  mortality  rates  stabilize  at  lower  levels  over  the  next  century.7   Although  fertility  and  mortality  rates  are  declining  across  the  globe,  older  groups  are  increasing  in   size  as  existing  populations  age  transforming  demographic  structures  from  a  pyramid  towards  a   rectangle  age  profile.8     Life  expectancy  in  the  United  States  was  47.3  years  for  a  person  born  in  1900,  68.2  years  for  a   person  born  in  1950,  and  78.7  years  for  a  person  born  in  2010.  Remaining  life  expectancy  at  age   65  has  also  greatly  increased  over  the  past  half-­‐century,  from  13.9  years  in  1965  to  19.1  years  in   2010.9  Both  statistics  are  prime  examples  of  the  increases  in  longevity  due  to  advances  in  health   care  and  social  programs,  yet  over  this  period  the  average  retirement  age  has  remained  largely   unchanged.  Expecting  younger  generations  to  finance  unfunded  retirement  and  health  care   benefits  will  constrain  most  developed  nations  future  prosperity.     Source:  U.S.  Centers  for  Disease  Control  and  Prevention                                                                                                                   7  TED.  “Hans  Rosling:  Religions  and  babies.”  Accessed  June  20,  2014.  http://www.ted.com/talks/hans_rosling_religions_and_babies#t-­‐781676.   8  Gates  Foundation.  “2014  Annual  Letter,  Myth  Three”.  Accessed  June  20,  2014.  http://annualletter.gatesfoundation.org/#section=myth-­‐three.   9  U.S.  Centers  for  Disease  Control  and  Prevention.  “2013  Health  Statistics,  Table  18.”  Accessed  June  20,  2014   http://www.cdc.gov/nchs/data/hus/2013/018.pdf.   0" 50,000" 100,000" 150,000" 200,000" 250,000" 300,000" 350,000" 1950" 1960" 1970" 1980" 1990" 2000" 2010" Popula'on)(in)thousands)) Year) US)Popula'on)by)Age,)1950)?)2010) 85+" 65-74"years" 55-64"years" 45-54"years" 35-44"years" 25-34"years" 15-24"years" 5-14"years" 1-4"years" Under"1"year"
  8. 8.  7   A  country’s  economic  productivity  is  greatly  influenced  by  each  generation’s  education,  health   care,  and  social  demands  as  they  transition  through  life.  Age  groups  are  classified  to  better   understand  and  track  their  characteristics  across  time.  Recent  cohorts  in  the  United  States  include   the  Lost  Generation  from  1883  to  1900,  the  GI  Generation  from  1901  to  1924,  the  Silent   Generation  from  1925  to  1945,  the  Baby  Boom  Generation  from  1946  to  1964,  Generation  X  from   1965  to  1979,  the  Millennial  Generation  from  1980  to  2001,  and  the  New  Silent  Generation  from   2001  to  the  present.     Current  demographic  and  policy  discussion  revolves  mostly  around  the  Baby  Boom  Generation   because  of  their  influx  in  size  and  overall  influence  held  across  economic,  political,  and  social   dynamics  in  the  United  States.  Increases  in  fertility  rates  after  major  wars  are  common,  but  the   period  following  WWII  was  unique  because  levels  remained  elevated  for  nearly  two  decades   spurring  a  population  wave.  Generation  X,  the  group  between  Baby  Boomers  and  the  Millennial   Generation,  is  smaller  in  size  creating  a  relative  gap  in  the  workforce.     Due  to  a  number  of  factors  ranging  from  the  recent  financial  crisis,  housing  market  collapse,  and   underfunded  retirement  savings,  Baby  Boomers  are  remaining  in  the  workforce  longer  than   previous  groups.  Labor  force  participation  for  the  age  group  55  and  older  has  not  been  at  current   levels  since  the  1960s,  while  participation  amongst  the  core  workforce  peaked  in  1999  and  has   decreased  since.  The  core  workforce  age  25  to  54  also  exhibits  a  higher  unemployment  rate   relative  to  the  older  group  age  55  and  over.10  Older  groups  waiting  to  retire  benefit  social   insurance  programs  through  ongoing  income  taxes  and  delaying  benefits,  but  also  impacts   opportunities  for  younger  portions  of  the  workforce.     Source:  U.S.  Department  of  Labor:  Bureau  of  Labor  Statistics   All  Baby  Boomers  will  be  age  65  or  older  by  2030,  at  which  time  it  is  expected  the  Boomer  cohort   will  comprise  twenty  percent  of  the  population.  American’s  at  age  65  and  older  are  forecasted  to                                                                                                                   10  U.S.  Department  of  Labor:  Bureau  of  Labor  Statistics.  “FRED  Unemployment  Rate,  Age  25-­‐54,  Age  55+.”  Accessed  June  20,  2014.     0.0# 10.0# 20.0# 30.0# 40.0# 50.0# 60.0# 70.0# 80.0# 90.0# 1948# 1950# 1952# 1954# 1956# 1958# 1960# 1962# 1964# 1966# 1968# 1970# 1972# 1974# 1976# 1978# 1980# 1982# 1984# 1986# 1988# 1990# 1992# 1994# 1996# 1998# 2000# 2002# 2004# 2006# 2008# 2010# 2012# 2014# As#%#of#Cohort# Civilian#Labor#Force#Par6cipa6on#Rate# 25#to#54#years# 55#years#and#over#
  9. 9.  8   outnumber  the  population  age  18  and  under  by  2056.11  Permanent  shifts  are  occurring  that  will   influence  not  only  social  insurance  programs,  but  also  many  other  aspects  of  American  business   and  life.  Applying  traditional  logic  to  systems  that  rely  on  a  significant  base  of  young  workers  for   support  will  undoubtedly  be  challenged  in  an  aging  world.   Modern  population  characteristics  are  fairly  predictable  across  time.  Individuals  give  birth  and   those  children  become  adults  twenty  years  later.  Around  the  age  of  forty,  they  fully  transition  into   adulthood  and  a  certain  percent  are  likely  to  have  conceived  children.  About  twenty  years  later,   they  enter  retirement  and  eventually  pass  away  around  the  age  of  eighty.  Dependency  ratios   afford  great  perspective  on  population  structure  over  time  by  comparing  the  dependent   population,  children  under  18  years  old  and  elderly  65  years  or  older,  to  the  working  age   population.  Because  most  government  programs  are  largely  financed  through  payroll  taxes  on  the   working  population,  changes  in  these  ratios  reflect  the  unsustainable  nature  of  their  current   structure.     Youth  dependency  in  the  U.S.  has  relatively  decreased  since  1940,  but  old  age  dependency   continues  to  grow.  Over  the  next  few  decades,  total  dependency  as  a  percent  of  the  workforce  will   near  levels  not  seen  since  the  1960s  and  1970s.  But  during  this  earlier  period  there  were  a  large   group  of  dependent  youth  about  to  enter  the  workforce.  Today  there  is  a  large  group  of  the   workforce  entering  retirement  and  becoming  dependent.  This  shift  conforms  to  the  notion  raised   earlier  of  the  population  rebalancing  from  a  pyramid  shape  to  a  rectangle  age  profile  across  time.   Pyramid  shaped  financing  systems,  where  a  continuously  growing  lower  base  of  supporters  is   needed  to  support  the  top  level  of  beneficiaries,  break  down  under  this  transformation.     Source:  U.S.  Census  Bureau   Aging  demographics  is  also  a  global  issue.  China  and  India  are  the  only  countries  to  exceed  the   United  States  in  population  age  65  and  older  in  size  by  2050.12  This  transformation  over  the  next   half  century  will  not  occur  without  placing  strain  on  governments  and  their  social  insurance   programs.  Even  though  the  number  of  Americans  age  65  years  and  older  will  outnumber  similar                                                                                                                   11  U.S.  Census  Bureau.  “2012  National  Population  Projections.”  Accessed  June  25,  2014.   http://www.census.gov/population/projections/data/national/2012.html.   12  U.S.  Census  Bureau.  “An  Aging  Nation:  The  Older  Population  in  the  United  States.”  Accessed  June  25,  2014.   http://www.census.gov/prod/2014pubs/p25-­‐1140.pdf.  
  10. 10.  9   groups  in  all  other  developed  nations,  as  a  percent  of  the  total  population,  the  U.S.  will  remain   younger  than  much  of  Europe,  Canada,  Japan,  and  Russia.       Source:  U.S.  Census  Bureau   Immigration  is  another  force  transforming  the  U.S.  alongside  aging  demographics.  The  country  is   expected  to  not  only  become  much  older,  but  also  more  racially  and  ethnically  diverse  over  the   coming  decades.  Balancing  differences  in  cohort  size  across  generations  will  provide  greater   resources  to  sustain  transfer  schemes  over  the  long-­‐term.  But  short  to  intermediate  challenges   facing  social  insurance  systems  resulting  from  fluctuating  group  sizes  and  an  inconsistent   structure  threaten  future  prosperity.  
  11. 11.  10   1.3  Fiscal  Environment   Federal  government  spending  has  changed  greatly  over  the  United  States  history.  WWI  and  WWII   caused  significant  amounts  of  revenue  to  be  directed  towards  national  defense  programs  but  this   trend  returned  to  normal  levels  after  wartime.  To  facilitate  the  analysis  and  better  understand   variations  in  federal  expenditures  over  time,  government  programs  will  be  classified  into  four   major  categories:  entitlements,  national  defense,  infrastructure  and  services,  and  net  interest.   Entitlements  include  all  social  insurance  and  health  care  programs,  veteran’s  benefits,   unemployment  compensation,  job  training,  and  related  costs.  National  defense  includes  military   expenditures  such  as  maintenance  of  the  Air  Force  and  Coast  Guard.  Net  interest  covers  the   ongoing  and  legacy  financing  costs  resulting  from  national  deficits.  Infrastructure  and  services   include  transportation  and  agriculture  programs,  federal  employee  compensation,  science  and   technology  programs,  the  judicial  system,  and  all  other  discretionary  spending.  These  categories   are  graphed  as  a  percent  of  GDP  below  to  not  only  visualize  how  tax  dollars  are  spent  but  also  to   display  the  changes  over  time  relative  to  U.S.  productivity.     Source:  The  White  House  Office  of  Management  and  Budget     The  government  has  spent  a  majority  of  tax  revenue  on  national  defense  until  the  1970s  after   which  entitlement  expenditures  overtook  all  other  programs.  The  traditional  function  of   government  is  often  thought  as  maintaining  the  nations  infrastructure,  overseeing  the  judicial   system,  providing  national  defense,  supporting  science  and  technology,  and  guiding  the  education   system.  Yet  the  largest  portion  of  tax  revenue  is  directed  towards  the  entitlement  system.  Because   entitlements  are  politically  untouchable,  it’s  easy  to  see  how  other  federal  programs  are   stagnating  relative  to  international  standards.   0%# 5%# 10%# 15%# 20%# 25%# 30%# 35%# 40%# 45%# 1940#1942#1944#1946#1948#1950#1952#1954#1956#1958#1960#1962#1964#1966#1968#1970#1972#1974#1976#1977#1979#1981#1983#1985#1987#1989#1991#1993#1995#1997#1999#2001#2003#2005#2007#2009#2011#2013# 2015#es/m ate# 2017#es/m ate# 2019#es/m ate# Outlays(as(%(of(GDP( Federal(Government(Spending(by(Program( En/tlements# Na/onal#Defense# Infrastructure#&#Services# Net#Interest#
  12. 12.  11   Government  revenue  is  derived  from  taxes  on  individual  income,  payroll,  corporate  income,   excise,  and  other  activities.  Individual  income  taxes  are  the  main  source  of  revenue  that  has   produced  nearly  half  of  all  government  receipts  over  the  past  half  century.  Payroll  taxes  are  the   second  largest  driver  of  revenue  for  the  government,  increasing  from  about  ten  percent  in  the   1950s  to  about  forty  percent  of  total  revenue  in  recent  years.  Corporate  income  taxes  and  excise   taxes  have  both  dropped  significantly  over  this  period.  As  exhibited  in  the  graph  below,  a  growing   and  prosperous  workforce  is  critical  to  maintaining  the  tax  base  necessary  to  support  most  federal   programs.       Source:  The  White  House  Office  of  Management  and  Budget     As  individual  income  and  payroll  taxes  are  the  largest  drivers  of  government  revenue,  the   workforce  is  held  responsible  for  the  unsustainable  costs  of  social  insurance  and  other   government  systems  unless  their  funding  structure  is  reformed.  Large  groups  of  the  population   are  disconnected  from  the  true  cost  of  these  programs  and  at  the  same  time  inequitably  benefiting.   It  is  becoming  politically  impossible  to  address  this  fact  and  will  intensify  if  responsibility  is  not   shared  across  the  country’s  elected  representatives.   The  U.S.  President  submits  an  annual  budget  proposal  that  reviews  the  current  state  of  federal   programs  and  compiles  historic  and  forward  looking  financial  activity.  The  budget  proposal  is  a   collection  of  analysis  issued  by  The  Office  of  Management  and  Budget  and  other  agencies.   Congress  either  accepts  or  rejects  the  President’s  budget  and,  if  accepted,  it  is  enacted  into  law.   Federal  budgets  are  unique  because  they  are  compiled  on  a  cash  basis,  only  reflecting  income  and   expenditures  that  have  occurred.  In  direct  comparison,  U.S.  regulatory  bodies  require  private   sector  businesses  to  report  on  an  accrual  basis.  Accrual  accounting  is  considered  a  more  accurate   representation  of  complex  entities  financial  health  because  it  includes  reasonably  estimated  future   income  and  obligations.  Although  the  government  is  obligated  to  maintain  federal  programs,   reasonably  accurate  unfunded  social  insurance  obligations  are  not  reflected  on  the  annual   0.0# 5.0# 10.0# 15.0# 20.0# 25.0# 1934# 1939# 1944# 1949# 1954# 1959# 1964# 1969# 1974# 1978# 1983# 1988# 1993# 1998# 2003# 2008# 2013# 2018# es/mate# Receipts(as(%(of(GDP( Sources(of(Federal(Revenue( Individual#Income#Taxes# Corpora/on#Income#Taxes# Payroll#Taxes# Excise#Taxes# Other#
  13. 13.  12   budget.13  This  leads  to  an  incomplete  perspective  of  the  programs  and  overall  country’s  financial   health.   The  fiscal  year  2015  budget  proposal  shows  that  the  government  expects  to  spend  3,651  billion   dollars,  but  only  collect  3,002  billion  dollars  in  2014.  The  difference  between  receipts  and  outlays   represents  a  649  billion  dollar  deficit.  Although  the  President  expects  deficits  to  decrease  or   stabilize  through  2024,  this  report  does  not  reflect  unfunded  social  insurance  obligations  or  their   indirect  cost  imposed  on  other  government  systems.  Elected  officials  often  use  these  reports  as  a   basis  for  legislative  decisions  and  their  overall  understanding  of  the  country’s  health.   Table  3  –  Presidents  2015  Federal  Budget     In  coordination  with  the  U.S.  Treasury  and  the  Office  of  Management  and  Budget,  the  Government   Accountability  Office  is  required  to  audit  the  country’s  annual  financial  report.  Each  department   includes  a  Management  Discussion  and  Analysis  section  similar  to  corporate  SEC  filings.  In  the   most  recent  audit  of  fiscal  year  2012  and  2013  financial  statements,  both  the  Treasury  Secretary   and  Comptroller  General  of  the  United  States  conveyed  an  urgent  need  for  social  insurance  reform   and  described  the  immediate  threats  facing  the  country  if  action  is  delayed.   Under  the  guidance  of  Secretary  Jacob  Lew,  the  Treasury  department  concedes  in  the  Financial   Report  of  the  United  States  Government:   Persistent  growth  of  health  care  costs  and  the  aging  of  the  population  due  to  the  retirement   of  the  “baby  boom”  generation  and  increasing  longevity  will  make  it  increasingly  difficult  to   fund  critical  social  programs,  including  Medicare,  Medicaid,  and  Social  Security.   Delaying  action  increases  the  magnitude  of  spending  reductions  and/or  revenue  increases   necessary  to  stabilize  the  debt-­‐to-­‐GDP  ratio.  Relative  to  a  reform  that  begins  immediately,   for  example,  it  is  estimated  that  the  magnitude  of  reforms  necessary  to  close  the  75-­‐year   fiscal  gap  is  more  than  20  percent  larger  if  reforms  are  delayed  by  just  ten  years,  and  more   than  50  percent  larger  if  reform  is  delayed  20  years.                                                                                                                   13  U.S.  Department  of  the  Treasury.  “Financial  Report  of  the  U.S.  Government,  Management’s  Discussion.”  Accessed  June  26,  2014.   http://fms.treas.gov/frsummary/FR-­‐Summary-­‐2013.pdf.   Source:  The  White  House  Office  of  Management  and  Budget  
  14. 14.  13   Economic  costs  of  delaying  social  insurance  reform  grows  exponentially  due  to  the  compounding   nature  of  unfunded  current  and  legacy  benefit  obligations.  As  determined  by  the  change  in   average  primary  surplus,  if  reform  occurs  in  2014  social  insurance  programs  will  cost  U.S.   economic  productivity  1.7%  of  GDP  until  2088.  This  increases  to  2.1%  of  GDP  if  reform  is  delayed   ten  years  until  2024  and  to  2.6%  of  GDP  if  reform  is  delayed  thirty  years  until  2034.14  A  longer   delay  in  addressing  the  structural  imbalances  of  critical  programs  that  millions  of  Americans  rely   upon  for  assistance  not  only  threatens  productivity  but  also  the  support  of  other  government   programs  and  the  economic  incentives  for  growth.   All  social  insurance  programs  have  surpassed  peak  funding  levels  and  most  trust  funds  are  paying   benefits  that  exceed  current  tax  revenue,  excluding  interest  on  fund  assets.  Trust  fund  assets  are   forecasted  to  be  exhausted  much  sooner  than  most  Politicians  and  the  American  public  is  aware   of.  Social  Insurance  programs  qualify  benefits  as  obligations  and  not  liabilities  because  current   law  mandates  that  only  the  available  trust  fund  assets  and  incoming  tax  revenue  be  used.  Unless   their  structure  is  reformed,  or  current  laws  are  adapted,  benefits  will  be  cut  to  match  tax  revenue   levels  for  each  period.  The  Disability  Insurance  program  is  in  the  worst  financial  shape  with  its   trust  fund’s  assets  depleted  in  2016.         Source:  Social  Security  and  Medicare  Board  of  Trustees     In  the  Financial  Report  of  the  United  States  Government,  Comptroller  General  Gene  Dodaro   explains:   Over  the  long  term,  the  imbalance  between  spending  and  revenue  that  is  built  into  current   law  and  policy  will  lead  to  continued  growth  of  debt  held  by  the  public  as  a  share  of  GDP.   This  situation—in  which  debt  grows  faster  than  GDP—means  the  current  federal  fiscal   path  is  unsustainable.  Further,  without  legislative  action,  the  Social  Security  Disability   Insurance  Trust  Fund’s  assets  are  projected  to  be  exhausted  in  2016,  at  which  time  the   Social  Security  Administration  would  need  to  reduce  benefits  consistent  with  available   funds.   Financial  oversight  and  federal  management  institutions,  established  to  protect  the  nation  and  its   people,  are  calling  for  reform  yet  neither  the  President  nor  Congress  is  materially  confronting   these  issues.  Millions  of  Americans  are  led  to  believe  systems  they’ve  paid  into  will  provide   support  even  when  the  U.S.  Treasury  and  Comptroller  General,  along  with  numerous  other   government  organizations,  are  warning  of  the  impending  reduction  in  benefit  levels.   Social  insurance  programs  are  underfunded  by  $39.698  trillion  dollars,  net  of  assets  and  future  tax   revenue,  if  continued  under  the  current  structure.  If  another  model  of  social  insurance  were  to   replace  the  existing  model,  either  advance  funded  or  a  separate  financial  form,  the  legacy  costs   and  beneficiary  obligations  remaining  to  be  funded  is  a  staggering  $53.974  trillion  dollars.  Social   Security  expenditures  in  excess  of  future  revenues  increased  9%  year  over  year,  and  will  likely                                                                                                                   14  U.S.  Department  of  the  Treasury.  “Financial  Report  of  the  U.S.  Government.”  Figure  3,  page  17.  Accessed  June  26,  2014.   http://fms.treas.gov/frsummary/FR-­‐Summary-­‐2013.pdf.   Key Dates for Trust Funds OASI DI OASDI HI Year of peak trust fund ratio 2011 2003 2008 2003 First year outgo exceeds income excluding interest 2010 2005 2010 2018 First year outgo exceeds income including interest 2022 2009 2021 2021 Year trust funds are depleted 2035 2016 2033 2026
  15. 15.  14   continue  as  program  assumptions  are  revised  and  the  Baby  Boom  cohort  fully  transitions  into   retirement.     Social  insurance  benefits  are  critical  to  maintaining  stability  across  a  large  portion  of  the   population  for  all  countries.  It  is  difficult  to  comprehend  the  magnitude  of  the  unfunded  liabilities   facing  the  United  States  without  context.  For  example,  global  pension  funds  assets  totaled  $31.980   trillion  dollars  in  2013  with  a  mere  $18.9  trillion  held  by  US  pension  funds.15  Net  worth  of  every   households  and  non-­‐profit  organization  in  the  United  States  is  $81.763  trillion  dollars.16    Net   worth  is  the  value  of  country’s  real  assets  (car,  house,  etc.),  savings,  investment  accounts,  and   other  assets  minus  its  debts  like  mortgages,  student  loans,  and  credit  cards.   To  fully  fund  social  insurance  obligations,  in  attempt  to  replace  the  current  unsustainable  system,   would  take  168%  of  global  pension  fund  assets  or  66%  of  US  household  and  nonprofit  wealth.   Social  Insurance  Future  Expenditures  in  Excess  of  Future  Revenues       Source:  U.S.  Department  of  Treasury   A  majority  of  the  unfunded  obligations  can  be  attributed  to  health  care  expenditures  for  retirees,   elderly,  and  the  poor.  Health  care  in  the  United  States  is  multitrillion-­‐dollar  industry  that,  as  a   whole,  charges  far  higher  rates  for  similar  or  relatively  worse  results  when  compared  to  all  other   developed  countries  in  the  world.  Some  argue  that  health  care  expenditures  are  high  because   Americans  have  a  greater  per  capita  income  relative  to  other  developed  countries,  neglecting  the   fact  it  also  has  the  highest  level  of  income  inequality.  Uneven  wealth  distributions  result  in  a   greater  portion  of  the  population  reliant  upon  safety  net  programs  to  subsidize  or  cover  the  costs.     Major  federal  health  programs  in  the  U.S.  include  Medicare,  Medicaid,  CHIP,  TRICARE,  and   Obamacare.  Medicare  is  a  federal  insurance  program  funded  through  payroll  taxes  and  provides   support  for  the  older  population  and  disabled  individuals.  Medicaid  is  a  health  assistance  program   for  low-­‐income  individuals  regardless  of  age.  The  program  is  financed  through  federal,  state,  and   local  taxes,  and  its  structure  varies  by  state.  CHIP  is  also  a  quasi  federal  and  state  health  care                                                                                                                   15  Towers  Watson.  “Global  Pensions  Asset  Study  –  2014.”  Accessed  June  26,  2014.  http://www.towerswatson.com/en-­‐US/Insights/IC-­‐ Types/Survey-­‐Research-­‐Results/2014/02/Global-­‐Pensions-­‐Asset-­‐Study-­‐2014.   16  U.S.  Federal  Reserve.  “Economic  Data:  Household  and  Nonprofit  Net  Worth.  Accessed  June  27,  2014.   http://research.stlouisfed.org/fred2/series/TNWBSHNO.   $ % Open Group (Net): Social Security (OASDI) (12,294.00)$ (11,278.00)$ 1,016.00$ 9.00% Medicare (Parts A, B, & D) (27,302.00)$ (27,174.00)$ 128.00$ 0.50% Other (102.00)$ (102.00)$ -$ 0.00% Total Social Insurance Expenditures, Net (Open Group) Total Social Insurance Expenditures, Net (Closed Group) Social Insurance Net Expenditures as a % of Gross Domestic Product (GDP)* Open Group 2013 2012 Social Security (OASDI) -1.20% -1.20% Medicare (Parts A, B, & D) -2.90% -3.00% Other 0.00% 0.00% Total (Open Group) -4.20% -4.20% Total (Closed Group) -5.50% -5.60% (53,974.00)$ (51,604.00)$ 2,370.00$ 4.60% Dollars in Billions 2013 2012 Increase / (Decrease) (39,698.00)$ (38,554.00)$ 1,144.00$ 3.00%
  16. 16.  15   program  that  provides  insurance  for  children  of  families  who  cannot  afford  private  insurance  but   do  not  qualify  for  Medicaid.  The  federal  government  matches  benefits  that  are  also  determined  by   the  states.  TRICARE  is  the  civilian  health  program  for  service  members,  retirees,  and  their  families   and  is  funded  through  the  Defense  Department.     The  Affordable  Care  Act,  otherwise  known  as  Obamacare,  is  a  federal  mandate  that  all  citizens   hold  insurance  either  through  private  carriers  or  public  programs.  It  created  a  national  insurance   exchange  to  provide  the  uncovered  population  with  insurance,  and  to  shift  other  health  program   costs  in  hope  of  avoiding  their  respective  insolvency.  Subsidies  in  Obamacare  are  funded  through   taxes  on  individuals  and  businesses.   It  is  tough  to  see  how  federal  health  care  spending  is  sustainable  alongside  the  passage  of  a   mandated  national  health  insurance  program.  Similar  to  other  social  insurance  programs,   Obamacare  should  have  been  evenly  implemented  years  ago  when  a  majority  of  current  high  cost   beneficiaries  were  still  working.  This  poses  another  drag  on  the  workforce  and  younger   generations  who  are  left  to  subsidize  health  care  expenses  for  retirees  that  were  never  held  to   such  standard  but  who  now  benefit.   With  the  significant  amount  spent  on  health  care  in  the  United  States  it  should  be  reasonably   expected  that  Americans  are  living  longer  and  are  healthier  as  a  result.  Life  expectancy  is  actually   a  year  less  than  the  OECD  average.17  Because  the  older  group  of  the  population  spends  the  most  on   health  care,  addressing  this  cost  benefit  relationship  is  critical  to  the  future  sustainability  of  social   insurance  programs.     Source:  Organisation  for  Economic  Co-­‐operation  and  Development   Health  care  spending  is  growing  faster  than  most  other  federal  programs  and  the  overall  economy,   a  trend  that  is  expected  to  continue  as  the  population  ages.  The  CBO  projects  that  by  2024  the  U.S.   government  will  spend  a  net  $858  billion  on  Medicare,  $582  billion  on  Medicaid  and  CHIP,  and   $137  billion  on  exchange  subsidies  and  other  items.  Of  the  government  expenditures  net  of  tax   revenue  generated,  sixty  percent  of  federal  health  care  spending  will  only  benefit  the  population                                                                                                                   17  Organisation  for  Economic  Co-­‐operation  and  Development.  “Society  at  a  Glance  2014  Highlights:  United  States  OECD  Social  Indicators.”  Accessed   June  30,  2014.  http://www.oecd.org/unitedstates/OECD-­‐SocietyAtaGlance2014-­‐Highlights-­‐UnitedStates.pdf.   8508 5669 5643 5099 4546 4522 4495 4448 4246 4118 4061 3925 3800 3700 3405 3374 3322 3305 3213 3182 3072 3012 2619 2421 2361 2239 2198 1966 1915 1689 1568 1452 1303 977 906 1316 1043 942 432 141 127 0 1 000 2 000 3 000 4 000 5 000 6 000 7 000 8 000 9 000 UnitedStates Norway Switzerland Netherlands Austria Canada Germany Denmark Luxembourg France Belgium Sweden Australia Ireland UnitedKingdom Finland OECD Iceland Japan NewZealand Spain Italy Portugal Slovenia Greece Israel Korea CzechRepublic SlovakRepublic Hungary Chile Poland Estonia Mexico Turkey RussianFederation Brazil SouthAfrica China India Indonesia USDPPPs Health expenditure per capita, 2011 (or nearest year) Private Public
  17. 17.  16   age  65  and  older.18  With  about  one  in  four  Medicare  dollars  spent  during  the  beneficiary’s  final   year  of  life.19  Again,  social  insurance  programs  are  unsustainable  under  their  current  financing   structure  of  taxing  the  working  population  in  an  aging  environment.   America  outspends  most  OECD  countries  on  health  care  per  capita.  In  1970  the  U.S.  was  spending   an  average  of  7.1  percent  of  GDP  on  health  care  while  the  OECD  average  excluding  the  U.S.  and   Italy  was  5  percent  of  GDP.  Forty  years  later,  spending  has  risen  to  18  percent  of  GDP  while  OECD   countries  average  10.6  percent  of  GDP.  Savings  are  estimated  to  be  1.05  trillion  dollars  per  year  if   the  country  matched  average  OECD  spending  on  health  care.20  Addressing  domestic  cost  and   current  benefit  levels  are  necessary  to  realign  social  insurance  programs  onto  a  sustainable  path.     Federal  health  care  spending  has  increased  faster  than  GDP,  and  at  a  pace  consistently  above   OECD  peers,  while  the  taxable  wage  base  supporting  the  social  insurance  system  has  shrunk.  A   trend  largely  driven  by  aging  demographics  (lower  level  of  labor  force  participation)  has  resulted   in  a  smaller  workforce  whose  real  wages  have  stagnated.  Effects  stemming  from  policies  are   visible  across  numerous  aspects  of  society  and  felt  by  all  population  cohorts.  A  national  discussion   is  critical  to  addressing  the  economic  and  fiscal  imbalances  stemming  from  aging  populations.                                                                                                                   18  U.S.  Congressional  Budget  Office.  “Shifting  Priorities  in  the  Federal  Budget.”  Slide  19.  Accessed  June  30,  2014.   https://www.cbo.gov/sites/default/files/cbofiles/attachments/45342-­‐StanfordEconomicPolicyResearch.pdf.   19  U.S.  National  Library  of  Medicine.  “Long-­‐Term  Trends  in  Medicare  Payments  in  the  Last  Year  of  Life.”  Accessed  June  30,  2014.   http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2838161.   20  The  Brookings  Institute.  “Growth  in  Health  Consumption  and  its  Implications  for  the  Financing  of  the  OASDI  Program:  An  International   Perspective.”  Accessed  July  1,  2014.  http://www.nber.org/programs/ag/rrc/rrc2012/summaries/1.2%20Bosworth,%20Burtless.pdf.  
  18. 18.  17   2.  Structural  Effects   “Compound  interest  is  the  eighth  wonder  of  the  world.     He  who  understands  it,  earns  it…  he  who  doesn’t…  pays  it.”  –  Einstein     The  disability  insurance  trust  fund  is  forecasted  to  be  exhausted  in  2016,  hospital  insurance  in   2026,  and  the  old  age  and  survivor’s  insurance  in  2035.  Recipients  and  the  population  at  large  will   experience  some  combination  of  forced  reform,  benefit  level  cuts  or  payroll  tax  increases,  if  these   structures  remain  unchanged.  Effects  stemming  from  legacy  and  unfunded  obligations  continue  to   compound  under  the  current  social  insurance  system,  negatively  influencing  the  United  States   economic,  political,  and  social  opportunities.  Mitigating  this  reality  before  action  is  forced  will   lessen  the  burden.   Entitlement  programs  have  surpassed  the  inflection  point  where  benefits  paid  outpace  the   underlying  tax  revenue  generated,  with  obligations  growing  at  a  faster  rate  than  the  economy.   Some  academics  and  investment  professionals  attribute  the  current  environment  as  to  being  “in   the  eye  of  a  storm.”21  Revenue  momentum  under  existing  legislation  supports  forward  movement   over  the  short-­‐term.  But  like  the  roadrunner  continuing  off  a  cliff,  gravity  of  unfunded  obligations   will  exhaust  remaining  fund  assets  and  eventually  catch  monthly  benefit  payments.     Growth  is  the  underlying  driver  of  revenue  for  most  business  and  government  programs.  It   incentivizes  future  generations,  creates  opportunity  for  the  workforce,  and  provides  leaders  with   the  ability  to  meet  overall  populations  needs.  Balancing  current  demands,  while  laying  the   groundwork  for  growth  for  the  next  generation,  is  the  difficult  but  necessary  role  of  contemporary   leaders.  A  lapse  between  focuses  sows  the  seeds  of  instability.   2.1  Social  Risks   Social  insurance  programs  are  considered  to  be  one  of  the  most  successful  government  systems   ever  implemented  in  the  United  States.  A  national  focus  on  old  age  health,  poverty,  and  financial   security  has  supported  many  social  trends  that  are  visible  through  fewer  associated  negative   effects,  while  other  causes  have  suffered  as  priority  is  given  to  these  issues.     It’s  important  to  keep  in  mind  the  second  derivative  impacts  while  considering  the  proceeding   risks.  A  question  posed  by  Hoover  Institute  fellow  Peter  Robinson  in  an  interview  between   Harvard  political  economics  professor  David  Wise  and  Stanford’s  Dean  John  Shoven  is  worth   considering  in  light  of  these  impacts.22   My  next  question  is,  in  general  terms,  how  bad  is  this  for  folks  in  the  next  generation?  But  let   me  get  to  this  question  in  this  way.  There's  an  article  in  the  current  Forbes  magazine  in  which   Peter  Drucker,  the  management  guru,  is  interviewed.  And  Drucker  points  to  a  couple  of   fascinating  population  statistics.  Italy,  which  has  a  population  of  60  million  today,  is  projected   to  go  down  below  40  million  in  2050.  Japan,  which  has  a  population  of  about  125  million,   projected  to  be  cut  in  half  within  a  century  on  current  birthrates.  Interesting?  What's  going  on?     Here's  what  Drucker  says  what's  going  on.  The  main  reason  for  the  decline  in  births  is  the   enormous  burden  on  people  of  working  age  supporting  older  people  in  retirement  who  are                                                                                                                   21  Milken  Institute.  “A  Conversation  with  Ken  Griffin  and  Steve  Schwarzman.”  Accessed  July  1,  2014.   http://www.milkeninstitute.org/events/conferences/global-­‐conference/2014/panel-­‐detail/4863.   22  Stanford  University  Hoover  Institute.  “Aging:  From  Baby  Boom  to  Bust.”  Accessed  July  1,  2014.  http://www.hoover.org/research/aging-­‐baby-­‐ boom-­‐bust.  
  19. 19.  18   hail  and  hearty.  You  cannot  cut  the  social  security  payments  of  older  people  because  that's  the   law,  so  they  cut  where  they  have  control,  which  is  having  babies.  Now  this  is  a  kind  of  Blade   Runner  nightmare  vision  in  which  the  older  people  in  effect  prey  on  the  younger  people.  Give   me  medical  care,  give  me  income.  It's  not  quite  that  bad  in  this  country,  is  it?  Or  is  it?   Individuals  act  out  of  their  own  best  self-­‐interest  in  making  economic  decisions.  Financial   resources  are  managed  prudently  when  the  environment  hardly  supports  living  standards.   Population  growth  through  higher  birth  rates  is  harder  to  achieve  in  economic  stagnation.  Like   much  of  the  developed  world,  China’s  demographic  environment  is  evolving  similar  to  Japan’s   aging  demographics  and  falling  birth  rates.  The  Chinese  government  has  lifted  its  one  child  policy   in  attempt  to  influence  population  growth,  but  less  than  3%  of  the  eligible  parent  base  has  elected   to  have  another  child.  Policy  analysts  observe  that,  “confidence  of  couples  in  their  ability  to   provide  for  a  second  child  may  also  be  waning  as  China’s  economic  growth  slows.”23  Growth   occurs  in  an  environment  that  supports  increased  wealth  and  economic  stability.  Policy  changes   cannot  immediately  reverse  long-­‐term  trends  driving  lower  real  incomes  and  stagnant  economies.   The  following  section  discusses  how  public  policies  on  defense,  education,  health  care,   infrastructure,  and  human  welfare  have  been  indirectly  affected  as  national  priorities  fluctuate   with  the  election  cycle  and  voting  bloc.  With  relatively  less  tax  revenue  and  slower  growth  to   bridge  obligations,  a  conscious  review  of  social,  economic,  and  political  systems  is  necessary  in   influencing  the  country’s  future.   2.1.1  National  Defense   National  security  financing  over  the  United  State’s  history  has  expectedly  increased  in  times  of   war  and  decreased  during  times  of  peace.  But  in  recent  and  forecasted  federal  budgets,  as   exhibited  in  the  following  graph,  spending  on  defense  is  trending  towards  levels  lower  than  the   peace  dividend  period  of  the  1990s.  This  is  thought  to  be  the  result  of  cost  cutting  measures  in  an   attempt  to  slow  the  growth  of  federal  debt  and  spread  tax  revenue  shortfalls  across  all  systems.       Source:  The  White  House  Office  of  Management  and  Budget                                                                                                                   23  Bloomberg.  “China  Baby  Boom  Wagers  Go  Bust  on  Child  Cost  Burden.”  Accessed  August  21,  2014.  http://www.bloomberg.com/news/2014-­‐08-­‐ 20/china-­‐baby-­‐boom-­‐wagers-­‐go-­‐bust-­‐on-­‐child-­‐cost-­‐burden.html.     0.0%$ 2.0%$ 4.0%$ 6.0%$ 8.0%$ 10.0%$ 12.0%$ 14.0%$ 16.0%$ 1948$1950$1952$1954$1956$1958$1960$1962$1964$1966$1968$1970$1972$1974$1976$1977$1979$1981$1983$1985$1987$1989$1991$1993$1995$1997$1999$2001$2003$2005$2007$2009$2011$2013$ 2015$es0m ate$ 2017$es0m ate$ 2019$es0m ate$ Outlays(as(%(of(GDP( U.S.(Na3onal(Defense(Spending(
  20. 20.  19   Recent  wars  in  the  Middle  East  have  strained  both  national  security  finances  and  public  support  to   raise  taxes  to  increase  program  funding.  Continuous  engagement  in  the  region  over  the  past   decade  has  negatively  influenced  domestic  productivity,  geopolitical  stability,  and  the   international  economy.24  Exhausting  critical  financial  and  political  resources  has  left  the  country   in  a  more  fragile  state  to  address  unforeseen  defense  issues  as  they  might  arise.   Legacy  and  ongoing  costs  of  war,  paired  with  the  impending  strain  on  social  insurance  programs,   should  stand  as  a  warning  to  elected  officials  to  allocate  available  resources  prudently  before   reform  restricts  the  country’s  ability  to  support  domestic  and  international  security.  Although   direct  transfers  cannot  be  made  from  defense  programs  to  social  insurance  because  of  how  the   systems  are  structured,  indirect  costs  of  fiscal  tightening  do  influence  national  priorities.  With  an   increasing  older  age  population  who  are  traditionally  predisposed  to  vote,  a  natural  disconnect   between  certain  government  benefits  and  underlying  costs  exists.   2.1.2  Education   Another  pillar  of  society  influenced  by  competing  federal  interests  is  the  country’s  education   system.  Education  is  financed  primarily  through  local  and  state  taxes  but  is  also  subsidized  by   federal  tax  provisions.  Management  of  the  system  is  left  to  each  state  to  implement,  but  the  federal   government,  overall  population,  and  media  significantly  influence  academic  standards.  The   foundation  of  a  competitive  workforce  and  prosperous  economy  is  directly  affected  by  the   economic,  social,  and  political  support  given  to  education  programs.     Once  a  leader  in  K-­‐12  and  higher  education,  U.S.  standards  across  subjects  such  as  math,  reading,   and  science  have  lagged  international  peers  for  decades.  A  recent  Organization  for  Economic  Co-­‐ operation  and  Development  (OECD)  study  found  the  country  spends  significantly  more  per   student,  yet  ranks  17th  in  reading  and  27th  in  math  skills  relative  to  all  other  developed  nations.25   Overarching  ideologies  around  learning  in  the  United  States  have  changed  very  little  in  decades.   Applying  the  same  structure  that  led  global  education  standards  nearly  a  century  ago  in  the   current  economic  environment  is  obviously  failing.   Higher  education  is  slightly  better  than  elementary  in  terms  of  efficiency,  but  some  aspects  do   inhibit  the  competiveness  of  future  generations.  A  majority  of  the  world’s  top  universities  can  be   found  in  the  U.S.  yet  college  graduates  age  sixteen  to  twenty-­‐nine,  that  hold  a  bachelor’s  degree,   rank  below  the  OECD  average  in  math  skills.26  27  Without  a  certain  level  of  technical  ability,  the   domestic  workforce  cannot  compete  with  global  peers  even  if  a  relatively  significant  portion  has   attained  secondary  degrees.     Tuition  inflation  has  also  impacted  opportunities  for  current  and  future  generations.  The  cost  of   higher  education  has  outpaced  the  cost  of  books  and  supplies,  housing  prices,  the  consumer  price   index,  and  average  hourly  wages  since  the  mid  1970s.  To  advance  in  a  competitive  and  recently   depressed  job  market,  many  students  are  forced  to  take  on  debt.  This  restricts  the  flexibility  and                                                                                                                   24  Stiglitz,  Joseph  E.,  and  Linda  J.  Bilmes.  "Estimating  the  Costs  of  War:  Methodological  Issues,  with  Applications  to  Iraq  and  Afghanistan."  Accessed   July  10,  2014.  http://www.socsci.uci.edu/~mrgarfin/OUP/papers/Bilmes.pdf.     25  Organisation  for  Economic  Co-­‐operation  and  Development.  “PSIA  U.S.  Education  Study  2012.”  Accessed  July  10,  2014.   http://www.oecd.org/pisa/keyfindings/PISA-­‐2012-­‐results-­‐US.pdf.   26  The  New  York  Times:  The  Upshot.  “Americans  Think  We  Have  the  World’s  Best  Colleges.  We  Don’t.”  Accessed  July  12,  2014.   http://www.nytimes.com/2014/06/29/upshot/americans-­‐think-­‐we-­‐have-­‐the-­‐worlds-­‐best-­‐colleges-­‐we-­‐dont.html?_r=0.   27  Organisation  for  Economic  Co-­‐operation  and  Development.  “United  States  Adult  skills  (Survey  of  Adult  Skills,  PIAAC).”  Accessed  July  12,  2014.   http://gpseducation.oecd.org/CountryProfile?primaryCountry=USA&treshold=10&topic=AS.    
  21. 21.  20   entrepreneurialism  of  the  workforce  as  once  an  individual  graduates  they  are  less  likely  to  take   risks  when  debt  must  be  serviced.       Source:  The  Economist     Responsibility  falls  upon  every  citizen  to  support  initiatives  that  improve  education  standards  and   provide  the  skills  necessary  for  meaningful  employment  across  all  trades.  The  U.S.  can  re-­‐establish   a  solid  economic  foundation  by  addressing  shortfalls  in  academic  attainment  and  standards   alongside  the  rapidly  increasing  cost  of  higher  education.  Programs  that  support  growth  in   national  productivity  will  ease  the  financial  burden  across  all  government  programs.   2.1.3  Health  Care   Developed  nations  have  come  to  expect  and  rely  upon  access  to  quality  health  care  at  all  stages  of   life.  As  discussed  earlier,  U.S.  social  insurance  has  provided  the  disabled,  poor,  and  older  age   groups  with  health  care  subsidies  in  hope  of  influencing  minimum  living  standards  across  the   population.  Access  to  health  care  from  entitlement  programs  and  the  Affordable  Care  Act  has   resulted  in  a  majority  of  the  population  holding  some  form  of  insurance.  Even  though  health  care   costs  in  the  United  States  are  significantly  higher  than  most  developed  nations  and  outcomes  in   terms  of  life  expectancy,  infant  mortality,  and  other  indicators  are  generally  worse,  the  goal  of   nearly  universal  coverage  is  being  achieved.28     Similar  to  the  education  system,  applying  traditional  ideologies  to  modern  health  demands  is   proving  inadequate.  Nationalizing  what  many  consider  should  be  entitled  conflicts  with  the  for-­‐ profit  structure  of  the  current  health  care  system.  Overtreatment  of  symptoms  and  unnecessary   procedures  drive  provider  revenue  and  increase  costs  to  the  consumer  and  general  public.   Preventative  measures  on  risks  such  as  diet,  exercise,  and  mental  health  gather  negligible  support   on  the  health  care  scene.   Seventy-­‐five  percent  of  national  health  care  spending  comes  from  chronic  disease.  Yet,  the  World   Health  Organization  estimates  that  if  preventative  measures  were  taken,  eighty  percent  of  heart   disease,  stroke,  and  type  two  diabetes  cases  would  be  prevented  and  more  than  forty  percent  of                                                                                                                   28  U.S.  Department  of  Health  and  Human  Services.  “National  Prevention  Strategy.”  Accessed  July  12,  2014.   http://www.surgeongeneral.gov/initiatives/prevention/strategy/report.pdf.  
  22. 22.  21   cancer  cases  would  be  prevented.29  Even  if  preventative  medical  care  costs  as  much  as  treatment,   the  country  would  be  healthier  and  more  productive  by  supporting  offensive  and  defensive  health   policies.  Government,  industry,  and  society  need  to  address  the  unsustainable  nature  of  the   current  system  to  be  able  to  provide  adequate  universal  health  care.   Because  entitlement  revenue  is  redistributed  from  payroll  taxes  to  qualified  recipients,  relying   predominantly  on  the  workforce  to  support  these  indifferences  is  inequitable  in  an  aging  society.   Mandated  health  insurance  spreads  the  cost  burden  from  unhealthy  older  groups  to  healthy   younger  groups.  Both  structures  negatively  impact  the  more  competitive  and  already  less   productive  economy.  Bridging  this  reality  could  prove  arduous  because  of  the  competing  interests   and  lobbying  reach  of  big  health  and  the  aging  population.  Priority  needs  to  be  given  not  only  to   access  to  universal  health  care  but  also  to  addressing  inadequacies  of  the  current  system.   2.1.4  Infrastructure   Infrastructure  is  another  luxury  that  modern  societies  have  come  to  expect.  But  with  fewer  tax   dollars  to  support  competing  demands,  American  infrastructure  has  fallen  as  a  national  priority.   Resulting  out  of  military  necessity  and  existing  structural  disparities  following  World  War  I  and  II,   the  interstate  highway  system  connects  over  forty-­‐seven  thousand  miles  and  took  thirty-­‐five  years   to  build.  A  majority  of  financing  to  build  and  maintain  the  system  is  derived  from  fuel  taxes  in   addition  to  bridge  and  highway  tolls.  Expenditures  on  maintenance  and  improvements  relative  to   usage  have  fallen  in  recent  years,  threatening  the  system’s  efficiency  and  safety.   President  Obama  proposed  creating  the  National  Infrastructure  Bank  (NIB)  to  support  the  nation’s   highways,  bridges,  and  other  public  infrastructure.  This  bank  was  proposed  to  lend  half  of  the   total  cost  of  a  publicly  beneficial  and  revenue  generating  infrastructure  project.  Local   governments  and  private  investors  are  expected  to  cover  the  remaining  financing.  The  US   Department  of  Agriculture  announced  a  related  program,  the  $10  billion  dollar  Rural   Infrastructure  Opportunity  Fund,  to  connect  institutional  investors  with  wastewater  projects,   energy  development,  and  infrastructure  development  in  rural  areas.  Whether  the  NIB  or  other   programs  are  enacted,  continued  support  is  necessary  to  realign  infrastructure  as  a  national   priority.   As  some  existing  infrastructure  has  already  failed,  like  the  Skagit  River  Bridge  in  Washington   State,  the  majority  of  United  States  infrastructure  is  in  need  of  additional  maintenance  or  repair.   The  American  Society  of  Civil  Engineers  estimates  that  one  in  every  nine  bridges  in  the  country   are  structurally  deficient  and  about  $76  billion  dollars  in  additional  funding  is  needed  to  repair  the   bridges  alone.30  State  and  federal  programs  to  support  such  activity  are  strained.  Rethinking  the   structure  of  domestic  public  investment  needs  to  be  addressed  if  traditional  tax  revenues  continue   to  fall  short  of  system  needs.                                                                                                                   29  National  Center  for  Chronic  Disease  Prevention.  “The  Power  of  Prevention:  Chronic  Disease.”  Accessed  July  20,  2014.   http://www.cdc.gov/chronicdisease/pdf/2009-­‐power-­‐of-­‐prevention.pdf.   30  American  Society  of  Civil  Engineers.  “2013  Report  Card  for  American  Infrastructure.”  Accessed  July  20,  2014.   http://www.infrastructurereportcard.org/a/#p/bridges/overview.  

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