U.S. In Worse Fiscal Shape Than Greece?

[vt]

• Economist Tells Congress: U.S. May Be in ‘Worse Fiscal Shape’ Than Greece

March 9, 2015 - 4:40 PM

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By Barbara Hollingsworth

Supporters of Syriza, Greece's new governing party, protest against more austerity measures in front of the Greek Parliament on Feb. 11, 2015 . (AP photo)

(CNSNews.com) -- The U.S. has a $210 trillion “fiscal gap” and “may well be in worse fiscal shape than any developed country, including Greece,” Boston University economist Laurence Kotlikoff toldmembers of the Senate Budget Committee in written and oral testimony on Feb. 25.“The first point I want to get across is that our nation is broke,” Kotlikoff testified. “Our nation’s broke, and it’s not broke in 75 years or 50 years or 25 years or 10 years. It’s broke today.

"Indeed, it may well be in worse fiscal shape than any developed country, including Greece," he said. (See Kotlikoff---Testimony-to-Senate-Budget-Committe.pdf)
In January, Fitch downgraded Greece, whose debt-to-Gross Domestic Product (GDP) ratio is 175 percent, from Stable to Negative.

“This declaration of national insolvency will, no doubt, shock those of you who use the officially reported federal debt as the measuring stick for what our country owes,” Kotlikoff told committee members who are considering President Obama’s proposed budget for Fiscal Year 2016.

“After all, federal debt in the hands of the public is only 74 percent of GDP. Yes, this is double the debt-to-GDP ratio recorded a decade ago. But it’s still a far cry from Italy’s 135 debt-to-GDP ratio or Greece’s 175 percent ratio.”

However, using the Congressional Budget Office’s July 2014 75-year Alternate Fiscal Scenario projection, Kotlikoff calculated that the U.S.' “fiscal gap” –which he defines as "the difference between our government's projected financial obligations and the present value of all projected future tax and other receipts" - is actually much higher than those of either Italy or Greece.
“We have a $210 trillion fiscal gap at this point,” Kotlikoff told the senators, which amounts to 211 percent of the U.S.’ $18.2 trillion GDP, making it higher than Greece’s 175 percent debt-to-GDP ratio.

The fiscal gap is “16 times larger than official U.S. debt, which indicates precisely how useless official debt is for understanding our nation’s true fiscal position,” said Kotlikoff, a former senior economist on President Ronald Reagan’s Council of Economic Advisers.

“Stated differently, the overall federal government is 58 percent underfinanced,” Kotlikoff testified.

“By way of comparison, the Social Security system, taken by itself, is 33 percent underfinanced.” Last year, Kotlikoff testified on Capitol Hill that the Social Security system was in “significantly worse financial shape than Detroit’s two pension funds taken together.”

Kotlikoff said that not counting “off book” liabilities like Social Security give lawmakers and the public a false sense of the nation’s true fiscal condition.

“What economics tells us is that we can’t choose what to put on the books. All government obligations and all government receipts, no matter what they are called, need to be properly valued in the present taking into account their likelihood of payment by and to the government,” Kotlikoff testified.

“Successive Congresses, whether dominated by Republicans or Democrats, have spent the postwar accumulating massive net fiscal obligations, virtually all of which have been kept off the books,” he noted.

Boston University economist Laurence Kotlikoff (Wikipedia)

“Congress’ economically arbitrary decisions as to what to put on and what to keep off the books have not been innocent,” he continued, criticizing what he called “the Enron-type accounting that’s been going on for decades under both parties.”

“A positive fiscal gap means the government is attempting to spend, over time, more than it can afford,” Kotlikoff explained, adding that every year of delay in addressing the problem makes it that much harder to close the fiscal gap.

For example, starting now, eliminating the fiscal gap would require an immediate 58.5 percent increase in all federal taxes or a 37.7 percent permanent, across-the-board decrease in federal spending.

But if the government waits 30 years, it would require a 77 percent tax increase or a 46.5 percent cut in spending by 2045 to eliminate the fiscal gap.

“Spending six decades raising or extending transfer payments and cutting or limiting taxes helped members of Congress get reelected. But it has placed our children and grandchildren under a fiscal Sword of Damocles that gravely endangers their economic futures,” said Kotlikoff, co-author of The Coming Generational Storm: What You Need to Know About Our Nation’s Economic Future, which was published in 2005.

[gnk]

Re: U.S. In Worse Fiscal Shape Than Greece?

It's not fully an apples to apples comparison - that's a huge fault in his logic.

The US still has a major reserve currency and maintains control of its issuance. Also the two economies are very different.

However, my biggest concern with the US is that all liabilities are not counted. In bankrupt Greece, government workers get a pension, but it is the only pension they get. In the US, a municipal, state, and federal employee will get a pension PLUS social security. In Greece, it's just one pension - whether you work at the local Division of Motor Vehicles at the municipal level or you work as a General in the Greek military at the national level - both pensions are paid for by the national government, and there is no second pension (social security).

Thus, I would like to see the US's numbers when it comes to all pension liabilities: municipal, state, and federal, PLUS the national program, Social Security. What does that number look like?

Many friends of mine here in Greece that work in the private sector and have their own business lament the fact that they didn't get a government job. I think that also holds true for the US as well, and indeed much of the Western world.

A government job: guaranteed pension, practically zero chance of getting fired or outsourced, and no job insecurity as one enters their 50s.

The opposite is true in the private sector. In the private sector salaries can get slashed overnight, no guarantee cost of living increase, pensions or 401ks wiped out, if they even exist, age discrimination, your company can be purchased or even go bankrupt, or your job may become outsourced or replaced by robots.

I think this is a major phenomenon that affects the West in general and it is barely discussed.

[dcarrigg]

Re: U.S. In Worse Fiscal Shape Than Greece?

gnk, just fyu, there are 14 states in which public employees are not covered by Social Security:


Alaska
California
Colorado
Connecticut
Georgia (certain local governments)
Illinois
Kentucky (certain local governments)
Louisiana
Maine
Massachusetts
Missouri
Nevada
Ohio
Rhode Island (certain local governments)
Texas

That's 43% of the country by population...

[gnk]

Re: U.S. In Worse Fiscal Shape Than Greece?

dcarrig, thanks for the info, I wasn't aware of that. I googled the issue and I see that also where one is eligible for both retirements, there is an offset to social security.

But nonetheless, when we just compare a country's debt load on the national level, liabilities on the state, county, and municipal level are not counted. Some countries don't have as much local debt as others, and so one country may have a much higher debt load than another when all levels of government debt are counted. I don't know, is that ever taken into consideration by rating agencies, bond markets. etc...?

[don]

Re: U.S. In Worse Fiscal Shape Than Greece?

Does the military fit into this analysis?

Can the Greek military prop up the Greek economy?

Does the US?

Just a thought.

[dcarrigg]

Re: U.S. In Worse Fiscal Shape Than Greece?

dcarrig, thanks for the info, I wasn't aware of that. I googled the issue and I see that also where one is eligible for both retirements, there is an offset to social security.

But nonetheless, when we just compare a country's debt load on the national level, liabilities on the state, county, and municipal level are not counted. Some countries don't have as much local debt as others, and so one country may have a much higher debt load than another when all levels of government debt are counted. I don't know, is that ever taken into consideration by rating agencies, bond markets. etc...?

States and munis issue their own bonds. Munis at least can pull Chapter 9 - go bankrupt. Plus they get their own ratings. States are murkier. But they have their own separate bonds and ratings too. Federal treasuries are backed by the Fed and 11 carrier groups. They'd be the last thing to go. Don't see any rational for lumping it all together. Since Dillon's Rule, munis are legally creatures of the state. They are incorporations that can be created and destroyed at will by the stroke of a pen - not too dissimilar from private corporations. State legislatures can fold them, combine them, shrink them, expand them, reorganize them, etc. if they want. State legislatures may also have the power to legislate pension obligations away, and some have done so, although there are active court battles trying to determine the extent of that power.

I guess your questions just seem funny to me, seeing as though they have separate bonding authority, bonds, and ratings. This is especially true having watched statehouses blink pensions out of existence all over the place for the last decade or so. Rhode Island effectively ended its state pension for all employees with fewer than 11 years in, and replaced it with a 401(k) with a paltry 1% match. Oklahoma did something similar, only for new employees coming in. 49 states have cut benefits. They'll keep doing it so long as ZIRP continues. Legislatures can just take what they want from retirees. Usually it's politically popular, since private sector workers have all had their retirements raided during the great offshoring of the last 20 years. Misery loves company.

So far as the US Federal government goes, well, at least for now, it makes the rules of the game. Ratings agencies can rate treasuries junk if they want. People will still buy them. The S&P downgrade had no effect. To borrow a turn of phrase from Winston Churchill: US Treasuries are the riskiest investment in the world, except for all the others.

[vt]

Re: U.S. In Worse Fiscal Shape Than Greece?

A friend that teaches public school in Montgomery County, MD told me that a teacher can start at 22, work 30 years and retire with full pension at 52. The they can cross the river to Fairfax County, MD and work 15 years, collecting another pension.
Plus they have social security and a 403B. Teachers get paid well in both counties and have excellent health care and other benefits. they do contribute a small amount to their pensions.

The private industry young person has to work until 67 to get full social security, and whatever they have in a 401K and/or IRA.

The private industry worker has less security for jobs and in retirement.

Who's working for who? Not begrudging the teachers or other government employees, but it's difficult for private industry to compete except at higher levels.

We need to create better, higher paying middle income jobs.

[touchring]

Re: U.S. In Worse Fiscal Shape Than Greece?

I think we need to consider more than fiscal but also geopolitical and social shape.

Greece as a state and identity existed since the Roman times and I'm sure Greece will exist for another 1000 years.

In comparison, I think no one knows if the USA as a country will exist in another 100 years.

[dcarrigg]

Re: U.S. In Worse Fiscal Shape Than Greece?

Not convinced teachers are the real threat to America. Nor am I convinced they're living high on the hog with their $50k/year after getting a master's degree. You can very easily make double that with a GED by being a real estate agent. Far more if you operate in a wealthy neighborhood. And all you do as a real estate agent is suck 6% off the people's mortgage payments for 30 years for doing literally nothing but showing up and not being totally unpleasant (that's the hard part). Thanks REALTORS®.

So who's working for whom?

And it's not just REALTORS®. There are millions of private-sector jobs like this.

Pharma sales rep = Be a Barbie or Ken doll with a BA in Communications that bribes - err "informs" - doctors into overprescribing drugs
Insurance agent = Be a middle man between actuary rates and customer rates. Pocket the difference. Helps to lie.
Financial advisor = Sell them whatever mutual fund has the highest fees and pays the highest commission out to meeeeeee!
Bankers = Take the biggest slice of their earnings you can as often as you can and manipulate all prices up whenever possible
Journalists = Screw the truth. Make up lies. Sell them the lies they want to hear.
Car Salesmen = Don't even try to sell them a car they want. Just make up lies, waste time, and talk about financing options.
Telemarketer = If I bother them hard enough, maybe they'll buy this crap

How many more industries can you think of off the top of your head? PR agencies? Cable companies? Credit bureaus? Credit card companies?

Every single one of these jobs makes living and doing business more expensive for everybody else. And that's not counting unscrupulous people in otherwise scrupulous professions. You or anyone in your family ever been ripped off by a builder? More common than you'd think. Face it, we're in the "service economy." 90% of us have jobs that consist exclusively of reaching into the next guy's pocket. Don't see what makes teachers special.

And in either event, I don't know where you expect the growth fairy to come from, or why you think she'd bless the US middle class. Feels like we sent her packing her 30+ years ago. Don't think she's coming back. She's too busy down in the Caymans making sure nobody has to repatriate their profits.

[thriftyandboringinohio]

Re: U.S. In Worse Fiscal Shape Than Greece?

...We need to create better, higher paying middle income jobs.

+1

And the crowd chants....

What do we want?
Wage Inflation!
When do we want it?
Now!

What do we want?
Wage Inflation!
When do we want it?
Now!

[shiny!]

Re: U.S. In Worse Fiscal Shape Than Greece?

Not convinced teachers are the real threat to America. Nor am I convinced they're living high on the hog with their $50k/year after getting a master's degree. You can very easily make double that with a GED by being a real estate agent. Far more if you operate in a wealthy neighborhood. And all you do as a real estate agent is suck 6% off the people's mortgage payments for 30 years for doing literally nothing but showing up and not being totally unpleasant (that's the hard part). Thanks REALTORS®.

So who's working for whom?

And it's not just REALTORS®. There are millions of private-sector jobs like this.

Pharma sales rep = Be a Barbie or Ken doll with a BA in Communications that bribes - err "informs" - doctors into overprescribing drugs
Insurance agent = Be a middle man between actuary rates and customer rates. Pocket the difference. Helps to lie.
Financial advisor = Sell them whatever mutual fund has the highest fees and pays the highest commission out to meeeeeee!
Bankers = Take the biggest slice of their earnings you can as often as you can and manipulate all prices up whenever possible
Journalists = Screw the truth. Make up lies. Sell them the lies they want to hear.
Car Salesmen = Don't even try to sell them a car they want. Just make up lies, waste time, and talk about financing options.
Telemarketer = If I bother them hard enough, maybe they'll buy this crap

How many more industries can you think of off the top of your head? PR agencies? Cable companies? Credit bureaus? Credit card companies?

Every single one of these jobs makes living and doing business more expensive for everybody else. And that's not counting unscrupulous people in otherwise scrupulous professions. You or anyone in your family ever been ripped off by a builder? More common than you'd think. Face it, we're in the "service economy." 90% of us have jobs that consist exclusively of reaching into the next guy's pocket. Don't see what makes teachers special.

And in either event, I don't know where you expect the growth fairy to come from, or why you think she'd bless the US middle class. Feels like we sent her packing her 30+ years ago. Don't think she's coming back. She's too busy down in the Caymans making sure nobody has to repatriate their profits.

Thanks, dcarrigg. Whenever times get tough people look for a scapegoat. It's always the teachers. The lucky ones manage to work for decently paying school districts that pay them enough so they can actually pay off their student loans, and give them a pension like middle class workers used to get. Then they are accused of being overpaid. As opposed to who, exactly? Any idiot with an MBA starts off being paid more than teachers who have been working for twenty years.

Teachers aren't overpaid. Their contribution to society is right up there with doctors but their pay is miniscule in comparison. They accept lower wages in exchange for generous pensions at retirement, but now people resent them for their pensions.

People say, "they get paid for sitting on their asses all summer." Wrong. Their nine-month salary is paid out over twelve months. If they change school districts they have to start over again near the bottom of the new district's pay scale. Their jobs are often more stressful than anyone on the outside can imagine. But they're a convenient scapegoat for everything that is wrong with society.

If you put a crab in a pot, it will climb out and run away. But if you put two crabs in the pot, each time one starts to climb out, the other will pull it back so neither one escapes. They become soup.

People in the sinking middle and on the bottom need to stop crabpotting each other! Turn our attention and pitchforks to Wall Street and Washington.

[rlskaggs2003]

Re: U.S. In Worse Fiscal Shape Than Greece?

Not begrudging the teachers or other government employees,

You might, if you spend a little time perusing the salaries and pensions of California public employees.

www.transparentcalifornia.com

You find little gems like, for instance, a Parking Enforcement Lieutenant at city of Del Mar making over $112,000 in salary and benefits. Lifeguards drawing over 90k. Police and fire employees juicing their pay with loads of OT. I could go on, but you get the idea. No wonder this state is so broke and so expensive to live in. Us private sector chumps carry a heavy load.

[dcarrigg]

Re: U.S. In Worse Fiscal Shape Than Greece?

That website was interesting, but I think it's a little screwy. I sorted it by highest total pay and benefits. First bunch are all college sports coaches making north of $2million. That's typical. A few million for managing an unpaid basketball team is par for the course in the dark year of our Lord 2015 AD.

But what caught my eye was a Lieutenant making over $1.2 million in salary and benefits. So I googled it. Turns out it looks like all that cash probably came off a lawsuit. http://cdn.ca9.uscourts.gov/datastor...3/10-55163.pdf.

I wonder what other weird payments the database is picking up? Although the firemen seem to be especially keen on juicing the OT. The ones at the top would have to be doing 4 24 hour days per week. And there's a few nurses that have to be pulling 52 100 hour weeks per year too in here. Can't be safe, even if it's true...

[vt]

Re: U.S. In Worse Fiscal Shape Than Greece?

Real Estate Agent. 6% commissions?

The average real estate agent makes about $40K. Technology will dramatically erode numbers of agents and commission rates.

Pharma sales rep = Be a Barbie or Ken doll with a BA in Communications that bribes - err "informs" - doctors into overprescribing drugs

Definitely need congressional action to keep costs reasonable, but not stifle new useful drugs.

Insurance agent = Be a middle man between actuary rates and customer rates. Pocket the difference. Helps to lie.

Need more consumer education here, plus there is competition with internet term offerings for life.

Financial advisor = Sell them whatever mutual fund has the highest fees and pays the highest commission out to meeeeeee!

Write your congressman to support the "Fiduciary Standard". If adopted these high commission vultures will be run off.

Bankers = Take the biggest slice of their earnings you can as often as you can and manipulate all prices up whenever possible

Internet banking is growing. Many are credit union members. Definitely need more consumer education here.

Journalists = Screw the truth. Make up lies. Sell them the lies they want to hear.

A diminishing breed. No one trusts, few listen.

Car Salesmen = Don't even try to sell them a car they want. Just make up lies, waste time, and talk about financing options.

Tesla model of no dealer is interesting. Other innovations on the way. Hard to break dealer support in state legislature.

Telemarketer = If I bother them hard enough, maybe they'll buy this crap

Another diminishing breed.

[vt]

Re: U.S. In Worse Fiscal Shape Than Greece?

Teachers were not paid as well in the past. In some areas of the country teacher may be underpaid. Teacher pay has improved more recently and benefits are much better than most private industry. Job security is certainly better than private industry.

Some teachers should be paid more, especially higher math, science, and computer. Also teachers in high risk schools should get hazard pay.

Here's some facts on teacher pay in Fairfax County, Virginia (one of the nation's wealthiest):

A 15 year teacher with a Masters is paid about $72K and continues to see inflation adjusted step ups each year. So two married teachers could get pay of $144K.

The median household income in the county is $112K, so this young couple of as young as 37 could be comfortably above average.

But the school year is only 180 days long so this teacher couple works less that 1,500 hours a year vs. private industry 2,000 hours a year. If the teacher works the 8 plus weeks school is out they can add to income. They make a higher than average income working 75% of the hours of a private sector worker. The benefits teacher get are much greater and generous.

You see similar figures in federal, state, and county workers. It's good to be a public servant.

We do need to reign in outrageous executive pay. We also need to go after the crooks in public and private industry. Fine them and jail them.