Americas Hidden Debt Bombs


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Americas Hidden Debt Bombs

  1. 1. THE HIGHLANDS TEA PARTY Sebring, Florida
  2. 2. America's hidden debt bombs
  3. 3. America's hidden debt bombs <ul><li>America's total debt load is on pace to top $13 trillion this year, and $22 trillion by 2020 -- and that's just the debt we're counting. </li></ul><ul><li>What's not being counted: </li></ul><ul><li>Potential debt bombs that don't get factored into most budget analysis. </li></ul>
  4. 4. America's hidden debt bombs <ul><li>When anyone talks about U.S. debt, they typically refer to two numbers. </li></ul><ul><li>The first is the debt held by the public . That's money owed to those who have bought U.S. Treasuries, most notably big bond mutual funds and foreign governments. </li></ul><ul><li>Debt held by the public today is roughly $8 trillion and rising. (March 1, 2010) </li></ul>
  5. 5. America's hidden debt bombs <ul><li>The second number is the money the federal government owes to government trust funds, such as those for Medicare and Social Security. </li></ul><ul><li>The government has used revenue collected for those programs to cover other outlays. Currently, the debt to the trust funds is approaching $5 trillion. </li></ul><ul><li>The two combined is the total gross debt that's accounted for. But deficit hawks also worry about what's not on the books. </li></ul>
  6. 6. Losses from Fannie Mae and Freddie Mac <ul><li>Fannie Mae and Freddie Mac are private companies that for years had the implicit backing of the federal government </li></ul><ul><li>That backing assured investors that if anything went seriously south for the companies Uncle Sam likely -- although not absolutely -- would step in. </li></ul><ul><li>Well, things did go south, and now both are run by the federal government . </li></ul>
  7. 7. Losses from Fannie Mae and Freddie Mac <ul><li>It's still not clear what the companies' total hit to the federal budget will be. </li></ul><ul><li>It is estimated that the total loss on the mortgages backed by the companies could reach $448 billion, with a portion of that covered by reserves or assumed by outside parties. </li></ul><ul><li>The CBO estimated the net costs to the government could top $370 billion by 2020. </li></ul>
  8. 8. Losses from Fannie Mae and Freddie Mac <ul><li>These are just estimates. But what's clear is that Fannie and Freddie are not cheap dependents. </li></ul><ul><li>&quot;Their costs are largely unmeasured, unrecognized in the budget and unmanaged,&quot; . </li></ul><ul><li>&quot;A troubling aspect of current policy aimed at restarting the financial markets is the likely expansion of implied guarantees to include the obligations of additional private financial institutions.&quot; </li></ul>
  9. 9. Unfunded promises <ul><li>The governments' accrued debt to the Social Security and Medicare trust funds is known. And making those payments -- which begin in earnest this decade --won't be easy given the drop in federal revenue and the surge in government spending. </li></ul><ul><li>&quot;[Lawmakers] need to acknowledge they have no way of funding them right now,&quot; said tax expert Len Burman </li></ul>
  10. 10. Unfunded promises <ul><li>The piece of future entitlement debt that's not reflected under current budget protocols is what the government will have to pay into the system after its payments to the trust funds end -- which will happen by 2037 for Social Security and within the next decade for Medicare. </li></ul><ul><li>At that point, the programs will only be collecting enough in taxes to pay a portion of the benefits currently promised. There will be enormous pressure on the government to make up the difference, and Uncle Sam would have to borrow a lot of money to do so. </li></ul>
  11. 11. True cost of tax breaks <ul><li>Everybody loves tax breaks. And there's more than a trillion dollars of them to love.. </li></ul><ul><li>That's the amount of money the Treasury foregoes in annual revenue as a result of the many breaks in the tax code. And that effectively increases the government's need to borrow. </li></ul><ul><li>But that trillion-plus isn't really up for consideration during annual budget discussions. &quot;Tax expenditures are basically hidden,&quot; </li></ul>
  12. 12. True cost of tax breaks <ul><li>No one advocates abolishing tax breaks altogether . </li></ul><ul><li>But tax expert Len Burman and others believe tax breaks should be treated as discretionary spending. The idea is to bring them into the open so lawmakers can make a conscious decision annually about what they spend on tax breaks and recognize the costs associated with that decision. </li></ul>
  13. 13. Long-term costs of new rules <ul><li>This year is the first year in which high-income investors with traditional IRAs or 401(k)s -- both of which let savings grow tax-deferred until withdrawn -- will have a chance to convert their accounts into Roth IRAs, where investments grow tax-free. </li></ul><ul><li>The new conversion rule is scored as a revenue raiser on the federal budget over the next decade because those who convert must pay the tax owed on their traditional IRA savings the year they convert. </li></ul>
  14. 14. Long-term costs of new rules <ul><li>But long-term it's a different story. Since investments in the converted accounts will grow tax-free, Uncle Sam will collect less revenue than he otherwise might have had the investors kept their ever-larger savings in a traditional IRA and paid taxes on them in retirement. </li></ul><ul><li>&quot;It will cost federal coffers a lot beyond the 10-year window,&quot; Burman said </li></ul>
  15. 15. Curbing debt <ul><li>At stake ultimately is the United States' status as a first-class economy. </li></ul><ul><li>It's going to take bold strokes to deal with this challenge. It's going to take big ideas, and it's going to take political courage because it's every hot-button issue that's out there. </li></ul><ul><li>It is Social Security. It is Medicare. It is revenue. All of them,&quot; said Senate Budget Chairman Kent Conrad, D-N.D., at a hearing on fiscal sustainability. </li></ul>
  16. 16. Curbing debt <ul><li>The president's yet-to-be formed bipartisan fiscal commission will be asked to propose ways to hit two key targets </li></ul><ul><li>to get annual deficits to 3% of gross domestic product by 2015 </li></ul><ul><li>to then stabilize the nation's total accrued debt at something far lower than 77% of GDP, which is where it would be by 2020 under President Obama's proposed 2011 budget. </li></ul>
  17. 17. Curbing debt <ul><li>As things stand today, federal spending -- much of it in Medicare and to a lesser degree Social Security -- is on track to grow much faster than the economy for decades. </li></ul><ul><li>To achieve better fiscal balance after the economy recovers means that lawmakers will have to agree to measures that run contrary to the ideologies of the left and the right: Cut spending and raise taxes. </li></ul>
  18. 18. Raise the Social Security retirement age <ul><li>As things stand today, federal spending -- much of it in Medicare and to a lesser degree Social Security -- is on track to grow much faster than the economy for decades. </li></ul><ul><li>Currently, the full retirement age is set to hit 67 in 2027. Moving up that timetable, and then adjusting the retirement age by just 1 month every 2 years after that, could take care of nearly a third of the long-term shortfall in Social Security. </li></ul>
  19. 19. Raise the Social Security retirement age <ul><li>&quot;As life expectancy increases, we just can't afford to support people in retirement for as long as we have currently under these programs . </li></ul><ul><li>To protect lower income seniors who depend most heavily on their Social Security benefits, one option would be to slow the growth of initial benefits for higher income people. </li></ul><ul><li>In terms of Medicare, MacGuineas said, one option is to ask higher income retirees who can afford it to contribute more to the cost of their benefits. </li></ul>
  20. 20. Reduce health insurance tax breaks <ul><li>Everyone agrees controlling health costs is one of the biggest steps needed to reduce the growth in U.S. debt over time. </li></ul><ul><li>One of the most effective ways to do so is to reduce or eliminate the tax breaks workers get when they buy their insurance at work </li></ul><ul><li>Currently, the portion of premiums paid by employers is treated as tax-free compensation to workers, and there is no limit on how much employers may contribute. </li></ul>
  21. 21. Reduce health insurance tax breaks <ul><li>The cost in forgone revenue over 10 years is $2.5 trillion, Conrad said. </li></ul><ul><li>A cap would mean workers would pay income tax on the portion of their employer's contribution above the cap. </li></ul><ul><li>The theory is that workers would avoid paying income tax by choosing lower-cost plans over time. </li></ul>
  22. 22. Broaden the tax base <ul><li>Close to half of tax filers will end up with no net federal income tax liability for 2009 thanks in large part to a complex host of credits, exemptions, deductions and exclusions. Those tax breaks reduce federal revenue intake by roughly $1 trillion a year. . </li></ul><ul><li>If we can get rid of a lot of tax expenditures, we can lower [marginal tax] rates actually below today's level and still raise additional revenues,&quot; said Rudolph Penner, a former CBO director who is now the co-chair of the Committee on the Fiscal Future of the United States. income tax by choosing lower-cost plans over time. </li></ul>
  23. 23. Consider new revenue options <ul><li>Generating more income tax revenue can be helpful, but raising taxes too high can dampen economic growth. So lawmakers will be looking for other sources of revenue on top of income taxes. </li></ul><ul><li>Among the ideas being considered is a national sales tax known as the value-added tax or a possible energy tax </li></ul>
  24. 24. CREDITS <ul><li>Jeanne Sahadi, senior writer February 15, 2010: </li></ul>