Tag Archives: Boomergeddon

Moody’s Reaffirms AAA Rating. Don’t Get Cocky, Virginia.

Storm clouds off the Virginia coast, circa February 2017. Photo credit: Strange Sounds.

Moody’s Investors Service, one of the nation’s three bond rating agencies, has reaffirmed Virginia’s AAA bond rating and stable financial outlook, the Richmond Times-Dispatch reports.

Moody’s had issued warnings that Virginia’s hallowed AAA status was looking fragile, due mainly to a sharp draw down in previous years of the Commonwealth’s budget reserves. The Revenue Stabilization Fund had shrunk to 1.5% of state general funds.

But the new budget, which awaits Governor Ralph Northam’s signature, appropriates an additional $90 million for the cash reserve, writes the T-D‘s Michael Martz, on top of the $156.4 million already pledged from excess revenues carried over from the fiscal year that ended June 30. The budget also will carry forward an expected $60 million in additional revenues from the current year into each year of the new biennium.

Moreover, said Secretary of Finance Aubrey Layne, a surge in income tax payments after the December tax cuts could produce $500 million in additional one-time payments of income taxes.

Bacon’s bottom line: Governor Northam has pulled off quite the trick, expanding Virginia’s Medicaid entitlement while shoring up state finances. While I am happy to see that Virginia remains one of the 14 states with the coveted bond rating, I regard AAA status as a minimal standard, not a mark of great fiscal probity.

Senate Majority Leader Tommy Norment, R-James City told Martz that the Moody’s report came as “no surprise.” He had characterized the warning about losing the AAA rating as “demogoguery and false assertion to try to scare legislators into voting for [Medicaid] expansion. Complete poppycock.”

I sympathize with Norment’s frustration over his inability to thwart the entitlement expansion, which will be paid for in part by a new tax on hospital revenue, which in turn, to an unknowable degree, will be passed on Virginians in the form of higher private health insurance premiums. I also resent that the public was not informed during the Medicaid-expansion debate of the full cost of the expansion, which will require additional revenues, as yet not identified, to increase reimbursement rates for physicians.

However, I also believe that numerous states and the U.S. government are building unsustainable mountains of debt that eventually will collapse during my lifetime with horrific consequences. The Medicare HI trust fund (for hospital payments) will run out in seven years, requiring Congress to come up with $52 billion (and more in future years) to maintain benefits. Social Security is dipping this year into its own trust fund for the first time since 1982; the trust fund will run out in 16 years, precipitating a 22% cuts to the program. Despite a tax-reform boost to revenues and a surge in economic growth, federal budget deficits are approaching $1 trillion a year. And an increasing number of states are one recession away from fiscal meltdown.

Incredibly, as the nation hurdles toward its rendezvous with Boomergeddon, national political leaders have abandoned any pretense of fiscal sanity. The Democratic Party is moving to the left, entertaining dreams of even greater entitlements. Trump-led Republicans fight increased deficit increases only fitfully, trading off increased domestic spending to pump up the military.

Yes, America is enjoying greater economic growth right now, but the jury is out whether the latest rounds of tax cuts will “pay for themselves.” (I remain dubious.) Global growth has been fueled since 2008 by unprecedented credit creation and debt accumulation, and massive structural vulnerabilities lie beneath the relatively placid surface of international finance. Sooner or later, a gasket will blow — Argentinian bonds, Italian banks, the Venezuelan economy, Chinese real estate markets, war in the Middle East, a cyber attack on the electric grid, or a black swan that no one can even imagine — and the shock will cascade in unpredictable ways through the global economy as one debt domino topples another. Sooner or later, the U.S. will experience a recession, and it will be a doozey.

So, yes, there is every reason to question the ability of the federal government to stick to its Medicaid-funding promises. There is every reason to fear that fiscally crippled states like Illinois, New Jersey, Connecticut and Kentucky will slide down the path to Puerto Rico-style insolvency and throw themselves upon the mercy of an already-overextended federal government, even while the threat of massive defaults roils financial markets and drives up the cost of government borrowing. And there is every reason to think that Virginia will experience a repeat of 2008-style fiscal stress, if not worse — even as it is forced to confront multibillion-dollar shortfalls in public-employee pensions that can no longer be deferred. 

Virginia needs to bullet-proof its budget, not with any old army-surplus vest but ceramic-plated Kevlar-backed body armor. We need a AAA+ bond rating. We need to restructure our economy, our land-use patterns, our transportation system, our health care system, our K-12 and higher-ed systems, our criminal justice system, and every other sphere of state and local government to be more fiscally sustainable during bitter times.

I know this gloom-and-doom talk sounds bizarrely unreal in a growing economy with a 3.4% unemployment rate. But the time to prepare for the storm is when it is far offshore, not when it is upon us.

Seven Years and Counting…

Medicare’s Hospital Insurance Trust Fund (HI) will be depleted in seven years — three years sooner than forecast previously, according to the 2018 Annual Report of the Medicare Boards of Trustees. By 2026, Medicare Part A, which covers hospital payments, will be running a $52 billion annual deficit, a gap that will increase rapidly in successive years.

The forecast is based upon implementation of current policy and makes a variety of assumptions regarding employment, growth of payroll tax receipts, and hospital costs that may or may not be on target. However, the trustees note, shorter-term projections are more likely to be accurate than longer-term projects — and seven years is not that far away.

The trustees’ report triggers a formal Medicare funding warning. President Trump must submit to Congress proposed legislation to respond to the warning within 15 days after submission of the FY 2020 budget. Congress is then required to consider the legislation on an expedited basis.

The political problem is that successive Congresses and presidential administrations have kicked the can down the road for so long that any fix will be politically painful. Rather than phasing in remedies over time, allowing a smoother glide path to solvency and making it easier for affected parties to adapt, Congress will have to enact dramatic remedies…. unless it decides to kick the can down the road again, perhaps by funding the Medicare HI  gap with general revenues.

According to the Congressional Budget Office’s most recent forecast, the federal government is on track to be running a $1.076 trillion budget deficit by 2026. Maybe Congress will say, what the heck, what’s another $52 billion, let’s fund the HI deficit with borrowed dollars. But maybe it won’t. If there’s another recession between now and then, the fiscal outlook could be a lot more alarming than it is today.

Winter is coming. Reforming the federal government is hopeless. Virginia’s only hope is maintaining a fiscally robust state and local government.

Virginia’s Hidden Deficit: the Unemployment Trust Fund

Virginia Trust Fund Solvency. Graphic credit: “Trust Fund Solvency Report 2018.”

There are many measures for gauging a state’s fiscal condition. The most commonly cited is the condition of its General Fund: Is the state balancing its budget? Digging deeper, one can examine the degree to which a state is funding (and falling short of) its pension obligations. And one can track the extent to which a state is neglecting repairs of  highways, transit systems, buildings, water-sewer facilities, and other public infrastructure, thus building up future maintenance obligations.

Then there’s the Unemployment Insurance Trust Fund. This is the fund, financed through employer payments, from which states draw to pay benefits to Virginians laid off from their jobs. State funds are designed to build up reserves during good times so they can maintain benefits during bad times when payments spike. If states run dry, they can borrow money from the federal government, which they then are required to repay. States are not directly on the hook for unemployment insurance. But restoring solvency to a fund by hiking employer contributions is the functional equivalent of a business tax increase. Lower business contributions make for a better business climate; higher contributions do the opposite.

So, it’s worth asking what kind of shape Virginia’s unemployment insurance reserves are in. And the answer is… not very good. Not the worst — we’re not in the same abysmal condition of California, Ohio or Texas, but we fall below the recommended minimum adequate solvency level. We probably could ride out a weak recession, but are ill prepared for a severe one.

The U.S. Department of Labor publishes an annual “State Unemployment Insurance Trust Fund Solvency Report.” Twenty-nine states, including Virginia, are beneath the recommended solvency standards. The Old Dominion’s relative position compared to other states is shown in the chart above. We’re in the middle of the pack. While we’re not far from the recommended level of solvency, we’re still below it — and we certainly haven’t built up large reserves like Wyoming and Oregon.

(For those tracking the 50 states’ progression toward Boomergeddon, note that several states noted for their fiscal profligacy — Illinois, Connecticut, Kentucky and New Jersey — have among the least adequately financed trust funds.)

As of Jan. 1, 2018, Virginia has $1,148,000,000 in its unemployment insurance trust fund. That may seem like a lot, but the number is meaningless without comparing it to the number of workers it is meant to cover. The chart atop this post gets to the adequacy of that number. Unfortunately, it is far from self explanatory.

The key numbers are associated with the four blue arrows.

The reserve ratio is derived by taking the trust fund balance and dividing by the state’s total wages paid for the year.

The 2017 benefit cost rate is calculated by expressing the level of uninsurance benefits as a percentage of yearly wages. A smaller number — Virginia’s is 0.19% — is good. It reflects Virginia’s low unemployment rate and low unemployment insurance payments.

But low unemployment is expected during periods of economic expansion. The acid test is how well the trust fund holds up in a recession. So, the Labor Department benchmarks against two measures: (1) the highest benefit cost rate ever, and (2) the average of the highest three highest years over the past 20 years.

The Labor Department then calculates the Average High Cost Multiple, which is the Reserve Ratio divided by the Average Benefit Cost rate. “Values greater than one,” states the report, “are considered the minimum level for adequate state solvency going into a recession.”

Virginia’s value is 0.92, meaning (as I understand it) that its trust fund has 92% of the reserves deemed adequate to make it through a recession without resort to extraordinary measures.

No Compromise on the AAA Rating

Virginia Secretary of Finance Aubrey Layne talks fiscal responsibility. Photo credit: Richmond Times-Dispatch

A downgrade of Virginia’s AAA credit rating could cost the Commonwealth between $33.9 million to $72.7 million in additional interest costs on its roughly $4.8 billion in state debt, says Secretary of Finance Aubrey Layne.

“If S&P downgrades and the other two follow, which they usually do, it could cost us millions,” Layne said, as reported by the Daily Press. “No governor, no secretary of finance, no legislator wants to be the guy on whose watch we lost the triple-A.”

Layne based his remarks on a preliminary assessment by the Public Resources Advisory Group, a New York-based consultancy hired by the state. The fragility of the state’s top bond rating has become an issue as the Governor Ralph Northam and the General Assembly continue to tangle with deep structural divisions over the fiscal 2019-20 biennial budget.

Thirty-four million dollars ain’t chump change. But in a two-year state budget of $114 billion, it’s a rounding error. OK, it’s a big rounding error, but it’s still a rounding error. Why do Virginians worry about the bond rating so much?

“Maintaining Virginia’s Triple-A bond rating is more than saving on the cost of borrowing, it is a recognition of being one of the best managed states in the country,” House Appropriations Chair Chris Jones, R-Suffolk, said, as quoted by the Richmond Times-Dispatch. Referring to the three bond-rating agencies that grade government debt, he added, “Virginia has been a Triple-triple A bond rated state for as long as bond rating agencies have conferred the rating, a distinction held only by a handful of states.”

The AAA bond rating is a red line that both Virginia Republicans and Democrats agree must not be breached — a rare example of bipartisan consensus. By itself, a downgrade to AA would not be the end of the world. AA is still investment grade, and Virginia still could issue bonds relatively cheaply. But allowing the rating to slip is like an alcoholic thinking, what the heck, it’s just one little drink, what could go wrong?

Over a couple of decades, AA degrades to A, and then to BBB. Next thing you know, you’re Illinois with billions in unpaid bills and a massive pension liability. And then you’re Puerto Rico, too fiscally feeble to respond effectively to a natural disaster.

At some point, whether ten years in the future or twenty, the federal government will face a fiscal crisis. The national debt exceeds $20 trillion, deficit spending soon will be adding another $1 trillion a year, interest rates on that debt are rising, and Washington, D.C., is neither interested in reforming the entitlement state nor in scaling back America’s global military commitments. Meanwhile, the Medicare Trust Fund for hospital expenses will run out in eleven years and the Social Security Trust Fund will run out in 16 years. And that’s the favorable scenario because it assumes no recessions between now and then.

When Washington plunges into crisis and chaos, we Virginians will be glad we have a federal form of government. And we’ll be glad the state has a AAA bond rating. While Illinois and New Jersey collapse into fiscal insolvency, the Commonwealth will be able to preserve essential functions of government. Virginia’s ability to maintain an orderly government and society is literally what’s at stake. That dystopian future is still a decade or two down the road, so prophesies of calamity seem like scare mongering. But absent a sea change in public and political sentiment that seems nowhere in evidence, that is where we’re heading, and that is why there can be no compromise on the AAA rating.

Can the U.S. Outgrow Its National Debt?

10-year economic growth — the critical variable. Graphic credit: Congressional Budget Office

In previous posts I have described the Republican-backed 2017 Tax Cuts and Jobs Act as a Hail Mary pass, a gamble that by boosting economic growth the United States can outgrow the burden of chronic deficits and a rapidly accumulating national debt. I wasn’t optimistic, but I was willing to wait and see. After the passage of the most recent budget, which will increase spending and push deficits even higher, I became downright pessimistic.

Now comes the Congressional Budget Office (CBO) with its latest 10-year budget forecast, which takes into account the tax cuts and the latest budget. There’s plenty of gloomy news. But the damage isn’t as dreadful as I had feared. There is a glimmer of hope, although it is dim one.

First the bad news: CBO estimates that the deficit for fiscal 2018 will be $218 billion larger than what it had previously forecast. And it projects a cumulative deficit that is $1.6 trillion larger than the $10.1 trillion that it had previously prophesied for the 2018-2027 period. Debt held by the public  (not including Social Security and Medicare trust funds) will rise from 78% of GDP to 96% by the end of the decade.

The CBO also struck a Boomergeddon-like tone by making the following points:

  • Federal spending on interest payments on that debt will increase  substantially, aggravated by an expected increase in interest rates over the next few years.
  • Federal borrowing will reduce national savings. The nation’s capital stock will be smaller, and productivity and total wages will be lower.
  • Lawmakers will have less flexibility to use tax and spending policies to respond to unexpected challenges.
  • The likelihood of a fiscal crisis in the United States will increase. Investors could become unwilling to finance the government’s borrowing unless they are compensated with very high interest rates. If that happens, interest rates on the federal debt will rise suddenly and sharply.

As the football follows its trajectory into the end zone and a half dozen receivers stretch out their hands to catch it, the outcome of the Hail Mary pass is still “up in the air.” In less metaphorically strained words, the game isn’t over yet.

This CBO statement surprised me: While the federal budget deficit grows sharply over the next few years, later on, between 2023 and 2028, “it stabilizes in relation to the size of the economy, though at a high level by historical standards.”

That’s huge! The danger is that the national debt will grow faster than the economy, thereby posing an ever-increasing burden until the economy collapses. But if that burden stabilizes, even at a higher level, there may be hope that the U.S. can muddle through as (another bad metaphor alert!) the Baby Boomer pig moves through the entitlement pipeline. Eventually, a few decades from now, the entitlement crisis will ease and deficit spending will shrink.

The CBO assumes that tax cuts will goose economic growth this year but that growth will moderate in future years — from a peak of 3.3% this year to 1.8% by 2020, 1.5% for the two years after that, and 1.7% for the five years after that. But a plausible case can be made that a combination of deregulation and tax cuts will stimulate faster long-term growth, even in the face of the inevitably higher interest rates. If so, CBO would be underestimating growth and tax revenue. In this optimistic scenario, growth as a percentage of GDP actually could shrink and Boomergeddon could be averted.

On the gloom-and-doom side, the CBO also assumes steady-state economic growth over the next 10 years. But a recession could knock the props from under the growth projects, running up deficits, the national debt, and interest payments on the debt. Indeed, a major recession could trigger a full-scale fiscal crisis. The current business cycle is already almost 10 years old, one of the longest in U.S. history. What are the odds that it will last 20 years? Almost nil.

The key variable is the rate of economic growth. If it exceeds the CBO’s modest expectations, the U.S. has a fighting chance of avoiding Boomergeddon. If we see another black swan event — a trade war breaking out, North Korea firing a nuclear weapon, Iran blockading the Persian Gulf, the overheated Chinese economy imploding, a run on Italian banks, or a surprise insolvency in the hyper-leveraged, hyper-connected global economy sparking a financial panic — we could experience another 2007-scale recession — but this time with annual $2 trillion-a-year deficits. Hold on to your hats, people, it’s going to be a wild ride.

State Pension Problems Still Getting Worse

Map credit: Pew Charitable Trusts

Another year, and another analysis by the Pew Charitable Trusts on the deteriorating condition of U.S. states’ public employee pension plans. Drawing on data from 2016, Pew concludes that despite scattered actions by the 50 states to shore up their pensions, the funding gap only got worse.

In 2016, the state pension funds in this study cumulatively reported a $1.4 trillion deficit—representing a $295 billion jump from 2015 and the 15th annual increase in pension debt since 2000. Overall, state plans disclosed assets of just $2.6 trillion to cover total pension liabilities of $4 trillion.

There is considerable variability between the states, however. The funding ratio (assets as a percentage of liabilities) ranges from 99% for Wisconsin, which is in fine shape, to 31% for Kentucky and New Jersey, which are in deep doo-doo. The national average is 66%. Virginia is in modestly better condition than the national average with a funding ratio of 72%. Our net pension liability in 2016 was “only” $25.3 billion.

Admittedly, 2016 was a tough year in which state pension plans generated a mere 1% return on their investments, significantly short of the 7% to 7.5% returns that most plans are predicated upon. (Virginia assumes a 7% return.) Investment performance shined last year, which could improve 2017 performance when Pew gets around to calculating it a year from now.

However, investment returns are likely to become more volatile, Pew notes. As the gap between the return on 30-year Treasury bonds and equity returns has widened over the past two decades, pensions have shifted assets to riskier investments in the hope of generating a bigger payback.

The share of public funds’ investments in stocks, private equity, and other risky assets has increased by over 30 percentage points since 1990—to over 70 percent of the portfolio of state pension plans. As a result, pension plan investment performance now tracks equity returns more closely than bond returns.

That’s great news when the stock market goes up, as it did last year. But when interest rates rise and market multiples shrink, as is happening this year, pension funds are vulnerable to setbacks in stocks, private equities, and interest-sensitive real estate investments.

Pew has developed a set of analytical tools that allow a more penetrating look at a state’s pension posture. One of those is “net amortization as a percentage of payroll for each state.”

There are two ways for states to increase the assets in their pension plans. One is to earn a higher rate of return on its investment portfolio. The other is to contribute more (in employee contributions and government contributions) into the plan.

With the “net amortization” metric, Pew assumes that the pension plan earns the assumed rate of return (even though that assumption isn’t always justified). The idea is to determine whether state/employee contributions are putting in enough to cover new benefits earned that year. States the study: “Plans that consistently fall short of this benchmark can expect to see the gap between the liability for promised benefits and available funds grow over time.”

Some states are doing a horrible job — Kentucky, New Jersey, and Illinois are ticking time bombs. Kentucky paid in only 41% of its benchmark in 2016, and New Jersey only 33%. The national average was 88%. Virginia looked pretty good by comparison, paying in 101% and whittling down its net liability by one whole percentage point! Continue reading

Petersburg Backs Away from the Precipice

Petersburg City Manager Aretha Farrell-Benavides

The City of Petersburg looks like it has finally dug out of its fiscal hole. City Manager Aretha Ferrell-Benavides presented a $73 million budget to City Council last week that restores funding to schools and public safety even while building up the cash reserve by $950,000.

Last year the city lurched from crisis to crisis after the discovery in 2016 that it was running a $20 million deficit. After bringing in consultants with the Robert Bobb Group, the city slashed funding across the board, cut salaries, and laid off administrative employees.

The proposed fiscal 2019 budget is $1.1 million smaller even than last year’s, yet it manages to increase public safety by $3 million and schools by $0.3 million. The city bond rating has been upgraded from junk to bond status, reports the Richmond Times-Dispatch.

The budget is spartan, no doubt, and many Virginia localities would find it unacceptably austere. One could argue that the budget fails to invest enough into K-12, one of the worst-performing school systems in the state. One could further argue that the budget is still fragile, thus vulnerable to a slowdown in the economy and tax revenues. But there is no nay-saying that Petersburg has survived one of the worst fiscal disasters experienced by a Virginia locality since the Great Depression. Government administration is far more disciplined as as a result, and the city is fiscally stronger than it has been in years.

Most remarkable of all, Petersburg pulled off this fiscal feat without benefit of government bail-outs or reneging on its debt. Kudos to Fredericksburg, to the Robert Bobb Group, to the citizen activists who kept the pressure on, and to the city officials who did what they had to do.

Bacon’s bottom line: There are two lessons to be learned here. First, Virginia’s system of government worked. The McAuliffe administration didn’t panic. The Secretary of Finance provided some professional assistance but didn’t turn the city’s fiscal plight into a broader political crisis. The Commonwealth made it clear from the beginning that Petersburg’s problem was Petersburg’s to solve. And rather than expend its political capital on blaming others and seeking bail-outs, Petersburg’s political leadership submitted to the discipline imposed by the Robert Bobb group.

Second, Petersburg’s resurrection serves as an example for other governments to emulate. Illinois, Chicago, and Hartford, Conn., are one recession away from fiscal collapse, and a dozen other states and localities are not far behind. Here in Virginia, we forced poor, economically struggling Petersburg to face the music — and it did. When the inevitable occurs, our congressional delegation must steel itself to the inevitable crocodile tears and special pleading from other jurisdictions and say, “If Petersburg did it, so can you.”

Medicaid, Pensions Kneecapping State Budgets

Graphic credit: Wall Street Journal

Take heed Governor Ralph Northam! Take heed Virginia House and Senate budget negotiators!

One in five tax dollars collected by state and local governments across the United States go to Medicaid and public-employee health and retirement costs. Of the $136 billion growth in inflation-adjusted taxes collected by state and local governments between 2008 and 2016, two-thirds went to funding Medicaid and pensions, according to the Wall Street Journal:

The picture will get worse as Medicaid expenditures metastasize and pension backlogs build. Medicaid’s annual cost, which was $595 billion in 2017, will exceed $1 trillion in 2026. States pay about 38% of that tab, although the percentage varies from state to state. A relatively affluent state, Virginia pays a higher percentage than average.

As Medicaid and pensions crowd out other spending, states have cut back on higher education, infrastructure, and aid to localities. Across the country, state cuts in support for higher education have prompted public colleges and universities to jack up tuition and fees, thus transferring costs to students and their families.

“The more we stare at the data, the more we realize all roads lead back to Medicaid and pensions,” says Dan White, a director at Moody’s Analytics, of the top three credit rating agencies.

Many localities are just one recession away from bankruptcy. The finances of Illinois, Connecticut, and New Jersey are in particularly perilous condition. Connecticut’s state capital, Hartford, narrowly averted bankruptcy last year. These high-tax states are caught between a rock and a hard place. Increasing state income taxes raises only a fraction of the anticipated revenue because they encourage wealthy taxpayers to leave for lower-tax climes.

States and localities shouldn’t expect much of a bail-out from Uncle Sam. As a different Wall Street Journal article today notes, interest payments on the national debt are doing to the federal government what Medicaid and pensions are doing to state governments.

To be sure, the U.S. federal government enjoys an unparalleled capability to borrow more money. And borrow it will. Interest payments swallowed 8% of federal revenue last year, the highest share of any AAA-rated country. Moody’s thinks that figure will triple to 21.4% by 2027.

“As interest is rising, that crowds out other spending,” says William Foster, a Moody’s analyst.

Many observers point to Japan as a nation with a national debt burden per capita twice that of the U.S. as a reason to be sanguine about the national debt. Japan may have lost its AAA rating, but it still has no problem borrowing. That analysis overlooks something that Japan has that the U.S. does not — a high personal savings rate. The U.S. personal savings rate was 2.4% in 2017. The savings rate in Japan fluctuates wildly from month to month but averaged out to 18% last year. In December, Japan’s personal savings hit the insane rate of 50%. Accordingly, as a percentage of tax revenue, Japan’s interest payments were only 5.3% — lower than the U.S. rate of 8.3%. Also, thanks to massive domestic savings, Japan does not rely upon fickle foreign creditors like the U.S. does.

Regardless, Republicans have pushed through a tax cut that, despite punching up the economic growth rate, will reduce revenues. Meanwhile, Republicans and Democrats have joined to enact a budget that boosts both defense spending (a Republican priority) and non-defense spending (a Democratic priority), while refusing to touch entitlements.

“We’re in a full-blown era of free-lunch economics where no one says no to anyone anymore,” Maya MacGuineas, president of the Committee a Responsible Federal Budget, told the Journal.

Virginia’s economic and tax revenues seem manageable for the next year or two, but budgets can unravel with horrifying speed. Very few foresaw the 2008 recession, much less its severity. Very few will see the next recession. Even fewer will be prepared. Will Virginia?

Just a Reminder…

The national debt has passed the $21 trillion mark. It took only six months to get there from $20 trillion. Unlike the last time the U.S. racked up debt this rapidly, the economy is growing, not in a recession. Blame whomever you want — Boomergeddon is coming. It’s just a matter of time.

Working Longer Versus Saving More

One of the big decisions Americans must make as they plant their retirement is when to start collecting Social Security benefits. The popular wisdom is that each year you delay collecting Social Security translates into an 8% increase in annual benefits. The Social Security Administration can afford to goose the payout because (1) it pays you one year less than it would have otherwise, and (2) it collects the interest on the money.

Now comes Sita N. Slavov, a George Mason University economics professor, and four colleagues with a paper, “The Power of Working Longer,” that compares the monetary rewards of working longer versus saving. The bottom line:

Delaying retirement by 3-6 months has the same impact on the retirement standard of living as saving an additional one-percentage point of labor earnings for 30 years.

I’m not smart enough to follow their methodology, so I’ll just assume that they’re right. But they’re making one critical assumption — that Social Security payouts remain the same, even though the Social Security Trust Fund is scheduled to run out in 2033. At that point, payroll taxes will cover only 75% of promised payouts.

For readers of Bacon’s Rebellion, who from my observation are more affluent than the average American, the news gets worse. When the Social Security Trust Fund runs out of money — as seems inevitable, given the bipartisan refusal of presidents and Congress since George W. Bush to touch the issue — you won’t even get 75% of what you were promised. Too many senior Americans rely upon Social Security as their sole source of income, and a cut of 25% would prove devastating. Inevitably, Congress will tweak the program to soften the blow. Thanks to the chronic budget deficits and the massive national debt that will prevail 15 years from now, the United States will be in no position to bail out the program entirely through borrowing.

There is no way to know what a future Congress will do, but I expect it will resort to some combination of borrowing, higher payroll taxes, and redistribution of Social Security benefits from higher-income Americans to lower-income Americans. There’s no way around it: The middle-class will get hosed.

I’ll qualify for Social Security benefits next year. Even though I plan to continue working and earning income, I’m going to start cashing in on the program while I’m still entitled to 100% of my benefits. I fully expect the Trust Fund to run out by the time I’m 80, and I’m arranging my financial affairs to accommodate a 25% to 30% cut in my Social Security benefits by then. In the meantime, I’m making sure I get what I’ve been promised.

I’m also telling my Millennial kids both to start saving now and to plan to work well into their late 60s. Hopefully, modern medicine will help them remain healthy, active and vigorous a bit longer than our generation, so a few extra years of work won’t prove too burdensome.

Nobody should trust the American political class to live up to its promises — especially when the consequences are 15 years down the road.