RSSThe Growing National Debt Intragovernmental Holdings 1968 - 2007
Intragovernmental Holdings is the name given to a method that is used to keep track of money that the government has borrowed from several government agencies—the primary one of which is the Social Security Administration. This gets somewhat complicated, so for the moment just think in terms of a married couple where the wife (the Social Security Administration in this case) has a job that provides a steady source of income (Social Security and Medicare payments from individuals and employers). The husband (the remaining parts of the federal government) borrows every cent that the wife makes, and gives her an IOU each time. He also promises to pay interest on the money that he has borrowed. And he agrees to pay for all of the things that she “buys” (payments to Social Security beneficiaries, in this example), which gets counted as an offset to the amount that he owes her.
In most years, the husband and wife spend more than both of them together make, so the husband borrows money from friends. So far, his friends continue to loan him enough money to keep him and his wife afloat. Both the debt to his wife (call it Intraspousal Holdings) and the debt he owes his friends (the Public) are growing. However, to include Intraspousal Holdings in a list of the husband’s liabilities is artificial in one sense, because when the husband and wife are considered as one entity, they only owe the amount that is payable to the outside friends. Nevertheless, in the interest of full disclosure, the husband makes it known that he owes both his friends and his wife a lot of money ($5 trillion to his friends and $4 trillion to his wife).
The Intragovernmental Holdings account is also equivalent to the so-called “trust funds” for Social Security, Medicare and several other programs that are handled in a similar manner. However, the only assets held by these “trust funds” consist of the IOUs given by the U.S. government as it “borrows” money from them. For practical purposes, the federal government treats Social Security and Medicare receipts as another source of taxes—second only in size to individual income taxes—that get spent each year.
8 Responses to “The Growing National Debt Intragovernmental Holdings 1968 - 2007”
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June 15th, 2008 at 11:39 pm
Notice how the debt fell only during Clinton’s time in office. It’s distressing to me how fiscally irresponsible the GOP has become. There’s absolutely nothing conservative about the fiscal policy this nation has operated under the last seven-plus years.
June 16th, 2008 at 9:05 am
Your discussion here is mostly correct, but your analogy about the married couple is somewhat off.
To be more precise about things we need to distinguish between the owner and the manager of these “intragovernmental” funds. Technically and conceptually, the owners of the Social Security trust funds bonds are the American workers who paid the taxes to purchase the bonds. The government is merely the fund manager here. The government does not own this asset. What is happening is that the fund manager is borrowing its clients money–which of course would be illegal in the private context.
The point matters because the married couple analogy makes it seem as if the wife could just forgive the husband’s debt to her and that would be that. This encourages people to think that the government could somehow repudiate this debt “to itself.” But the government can no more default on this debt than it can on the debt held by the public. Both asset portfolios are owned by someone other than the government.
More correctly, then, the “intragovernmental debt” is identical in its function to the debt held by the public. The distinction between them is artifical and misleading–as is the analogy of the married couple.
June 17th, 2008 at 3:02 pm
What if the money were never borrowed at all? Think of the magic of compound interest! Perhaps there would be no crisis now if we could have depended upon that interest.
June 22nd, 2008 at 8:40 pm
Let us not lose sight of the clinton “improvement” was fueled by tax revenues from the largest stock market bubble in history. With the losses in 2000-2004 the surplus evaporated.
June 23rd, 2008 at 2:12 pm
I agree something must be done. I am worried about the grand children’s futures. There is no magical number to apply towards social security the wages and tax rates are changing all the time! Should there be adjustments or totally cut out of the American dream? Lets just let everyone keep their own cash to put up for care later. Yes make each person responsible for their own affairs!
July 15th, 2008 at 5:19 pm
Is the Payroll Tax a Tax?
The Federal Insurance Contributions Act (FICA) tax is a United States payroll (or employment) tax imposed by the federal government on both employees and employers to fund Social Security and Medicare—federal programs that provide benefits for retirees, the disabled, and children of deceased workers. Social Security benefits include old-age, survivors, and disability insurance (OASDI); Medicare provides hospital insurance benefits. The amount that one pays in payroll taxes throughout one’s working career is directly tied to the social security benefits annuity that one receives as a retiree. This has led some to claim that the payroll tax is not a tax because its collection is directly tied to a benefit. No other country uses the word insurance in the business sense, which means to spread risks. The business sense of insurance includes the concept of examining clams to see if they fall within the contractual boundaries for payment.
For 2008, the employee’s share of the Social Security portion of the tax is 6.2% of gross compensation up to a limit of $102,000 of compensation (resulting in a maximum of in $6,324 total tax amount). This limit, known as the Social Security Wage Base, goes up each year based on average national wages and, in general, at a faster rate than the Consumer Price Index (CPI-U). The employee’s share of the Medicare portion is 1.45% of wages with no limit. The employer is also liable for separate 6.2% and 1.45% Social Security and Medicare taxes, respectively, making the total Social Security tax 12.4% and the total Medicare tax 2.9% of wages. In 2007, the payroll tax represented over 30 percent of the budget
In one theory, each employee builds up an account of 15.3 % up to $102,000 of their wages and 2.9 % after that amount. These funds go into a special Social Security fund and benefits are paid out of this account according to how much was paid in. In another theory, these funds are pooled together as premiums and then paid out as insurance benefits according to how much is paid in.
Because we tie Social Security and Medicare insurance to employment, this system is making us less competitive in the global economy. That is because no other country taxes employers for each employee they have on their books. Everywhere else this cost is part of the national ledgers just like the cost of police, education, and lifeguards.
The most widely accepted theory is that Social Security and Medicare taxes are a “social insurance” program. While some nations refer to their plans as insurance, they mean that in the political sense. The Supreme Court has twice declared that the payroll tax is a tax imposed by the congress and congress can treat the revenue just like any other tax, i.e. income tax. For practical purposes, the federal government treats Social Security and Medicare receipts as another source of taxes—second only in size to individual income taxes—that get spent each year.
Each year the payroll tax is collected to pay for the benefits of that year and the remainder is used as general funds by the government before borrowing from the general public to balance the budget. The funds are also used for the disabled and others unable to care for themselves. It is the duty of our government to insure domestic tranquility and promote the general welfare. To further this duty, the government collects revenue from workers to provide services to all citizens. This is the purpose of taxes.
The Center on Budget and Policy Priorities states that three-fourths of taxpayers pay more in payroll taxes than they do in income taxes. The FICA tax is considered a regressive tax on income (with no standard deduction or personal exemption deduction) and this tax is not imposed on investment income (such as interest and dividends). It should be criminal that through capital gains breaks and FICA taxes, we pay more taxes on the money we earn through work than on passive investment income.
The first thing this country needs to do is to decide which theory is correct or will best benefit society. The solutions will then present themselves. The next election may determine the outcome.
If each employee builds up a social security insurance account to purchase an annuity benefit, then government could simply require workers to purchase a minimum private annuity like IRAs and 401 k plans. All other benefits (including benefits for non-workers) would then be supplied by income taxes since it is the duty of government to promote the general welfare and not just the duty of employers and employees.
If these payroll taxes are pooled together as premiums and then paid out as insurance benefits according to how much is paid in, then government should establish a benefit fund like is required of private insurance companies to cover all claims and establish policies to examine clams to see if they fall within the contractual boundaries for payment. The premiums for non-workers would then be supplied by income taxes since it is the duty of government to promote the general welfare and not just the duty of employers and employees.
If the payroll tax is a tax, then its benefits should be equal for all. A poor man should receive as much in Social Security as a rich man no matter what they paid in just like income tax where each person pays according to what they make. If the payroll tax is a tax and is retained, there should not be a cap on gross compensation but there should be a personal exemption on the first dollars of earned income just like the income tax.
Taxpayers deserve to know what they are paying for. If politicians cannot define what a payroll tax is, then the payroll tax should be repealed and all benefits should be paid from the general fund. So what should our government’s policy on payroll taxes be?
P.S.
The fastest and strongest fiscal stimulus would be an exemption of the first $15,000 of income from payroll taxes.
July 17th, 2008 at 1:33 pm
To Iwd: Thanks for the further description. Other than citizen outrage, what forces are compelling the government to “pay back” these intragovernmental holdings. If the government “defaulted” on these holdings, is there legal recourse to reclaim “promised” funds if the government did default? I understand that the Congress is the lawmaking body in this instance, so what is stopping them from changing the benefits due to retirees to lower the intragovernmental debt. Thanks! idahoivan
September 18th, 2008 at 8:34 pm
To mrz (4):
If you look at chart 4 (budget deficits and surpluses), you’ll see the Clinton improvements to the national economy were basically linear for 8 straight years.
That’s no bubble.
All 3 Bush terms had extraordinary deficits during their 4th years. 2008 is estimated at $403B (2nd highest in history).