PHOENIX, Ariz. -- Congress can’t agree on how to cut the nation’s $1.2 trillion deficit. The United States’ total public debt now equates to more than 140% of its gross annual economic output.
And paying both those down – and getting any serious economic growth -- will be “pretty daunting,’’ says Robert D. Arnott, chairman and founder of Research Affiliates, a Newport Beach, California-based investment management firm. Because of demographics. Because post-war Baby Boomers will be retiring in droves.
Demographics is the third, little-noticed element added to the debt and the deficit that make for a “3-D Hurricane” that is about to impact the U.S. economy, over the next two decades, he told an audience of fund managers, index creators and wealth managers at the Super Bowl of Indexing here.
Nine years ago, the United States was adding 10 new working age adults between the ages of 20 and 64 to the work force for every potential retiree. By 2023, that will have flipped to 10 retirees for every new entrant into the work force.
That will produce significant “headwind” for making progress on cutting down the nation’s debt or its deficit. And for returns on financial assets, which improve when an economy does. Or decline, when it doesn’t.
The annual average deficit for the past 25 years has been about 2.4% of gross domestic product, his research notes. Not bad when growth is 3%.
But last year saw a deficit of 10% of gross domestic product. That may not stop.
In fact, he said that real gross domestic product is up barely 6% over the past decade, after taking into account the growth in public debt. And remains 10% below its 2007 peak.
Tax receipts have collapsed, the firm’s research indicates. Plus, the total public debt is not reported or discussed openly.
By Research Affiliates’ calculations, public debt and unfunded obligations grew in the last 12 months at a rate of 18% of GDP. And, if all obligations were totaled up, the debt is at 141% of GDP.
The full reckoning would include:
• Unfunded entitlement programs: The unfunded portions of Social Security and Medicare, for instance.
• Off-balance-sheet debt: A domestic example would be the modest prefunded portion of Social Security and Medicare, in the form of “trust funds,” which own nonmarketable U.S. Treasury Bonds.5 The “trust funds” don’t come close to fully prefunding for the projected entitlements.
• Government-sponsored entities: These are Fannie Mae, Freddie Mac and other organizations whose debt holding are backed by the full faith and credit of the government; hence, by future tax receipts.
• State and local debt and unfunded pension obligations: No other country in the world has as much state and local debt—a consequence of U.S. tax policy that allows local and state debt to remain exempt from federal tax and also allows prospective obligations to remain unfunded.
In the U.S., the combination of government-sponsored debt, state and local debt, unfunded pensions and entitlements add up to just under $60 trillion, roughly 10 times the official U.S. public debt, he noted.
And, with 10 times as many workers exiting the tax-paying work force as those that are entering it, tax hikes are nearly inevitable.
But a tax rate rise of 1% of GDP tends to decrease GDP by 3%, the firm figures.
“Demography does matter,’’ he said. “It matters more than most people realize.’’
Tom Steinert-Threlkeld writes for
