Courtesy of Doug Short.
Earlier this week I shared my historical perspective on Debt, Taxes and Politics. Let’s now take a closer look at Uncle Sam’s balance sheet for last year and the official government projections for 2012 and the decade beyond. With the intensifying election year debates on the federal budget, it seems particularly appropriate to understand the broader context.
For a quick review of 2011, here is a slide I’ve created for a presentation I’ll make at the Retirement Income Industry Association (RIIA) spring conference in Chicago next month.
As we can see, 2011 entitlement costs exceeded the entire tax revenue for the year — personal, corporate, and social.
However, according to the Congressional Budget Office (CBO), entitlements accounted for only about 59% of 2011 spending. Defense spending took another 19%, nondefense discretionary 18%, and interest payments 6%. We ended 2011 with an on-budget deficit of $1.363 trillion.
The gross federal debt for 2011 was $14.762 trillion. For 2012 the CBO projects an increase to $16.002 trillion.
Now let’s put the current deficit into the larger pattern of federal spending. I created the next two charts from a combination of CBO historical data since 1971 and their budget projections for 2012-2022. The first chart shows the astonishing growth of entitlements.
The next chart shows the projected gap between revenues and outlays over the next decade together with an overlay of the accelerating growth of public debt. As long as the red line is above the green, the size of the debt burden will accelerate.
The final chart below shows the growth of retirement entitlements as a percent of total US revenues since the early 1970s. I’ve excluded unemployment insurance, welfare grants, supplemental nutrition, family support, child care, etc. in order to highlight the growth of retirement-related costs: Social Security, Medicare/Medicaid, and government-paid pensions. As you look at this chart, bear in mind that the wave of retiring boomers is in its early stages. I added a polynomial regression to help highlight the broader trend. The upslope near the end is probably a reasonable projection of where we’re headed as the boomer generation transitions into retirement. Of course, the trend could be stabilized and reversed by tax increases, benefit cuts, or some combination of the two.
Over the next several months Congress will continue bickering over the budget, taxes and entitlements — no doubt with heightened drama against the election-year backdrop and the ongoing financial turmoil on the other side of the Atlantic.