Why $16 Trillion Only Hints at the US Debt
By CHRIS COX AND BILL ARCHER
A
decade and a half ago, both of us served on President Clinton's
Bipartisan Commission on Entitlement and Tax Reform, the forerunner to
President Obama's recent National Commission on Fiscal Responsibility
and Reform. In 1994 we predicted that, unless something was done to
control runaway entitlement spending, Medicare and Social Security
would eventually go bankrupt or confront severe benefit cuts.
Eighteen
years later, nothing has been done. Why? The usual reason is that
entitlement reform is the third rail of American politics. That
explanation presupposes voter demand for entitlements at any cost, even
if it means bankrupting the nation.
A
better explanation is that the full extent of the problem has remained
hidden from policy makers and the public because of less than
transparent government financial statements. How else could responsible
officials claim that Medicare and Social Security have the resources
they need to fulfill their commitments for years to come?
As
Washington wrestles with the roughly $600 billion "fiscal cliff" and
the 2013 budget, the far greater fiscal challenge of the U.S.
government's unfunded pension and health-care liabilities remains
offstage. The truly important figures would appear on the federal
balance sheet—if the government prepared an accurate one.
But
it hasn't. For years, the government has gotten by without having to
produce the kind of financial statements that are required of most
significant for-profit and nonprofit enterprises. The U.S. Treasury
"balance sheet" does list liabilities such as Treasury debt issued to
the public, federal employee pensions, and post-retirement health
benefits. But it does not include the unfunded liabilities of Medicare,
Social Security and other outsized and very real obligations.
As
a result, fiscal policy discussions generally focus on current-year
budget deficits, the accumulated national debt, and the relationships
between these two items and gross domestic product. We most often hear
about the alarming $15.96 trillion national debt (more than 100% of
GDP), and the 2012 budget deficit of $1.1 trillion (6.97% of GDP). As
dangerous as those numbers are, they do not begin to tell the story of
the federal government's true liabilities.
The
actual liabilities of the federal government—including Social Security,
Medicare, and federal employees' future retirement benefits—already
exceed $86.8 trillion, or 550% of GDP. For the year ending Dec. 31,
2011, the annual accrued expense of Medicare and Social Security was $7
trillion. Nothing like that figure is used in calculating the deficit.
In reality, the reported budget deficit is less than one-fifth of the
more accurate figure.
Why
haven't Americans heard about the titanic $86.8 trillion liability from
these programs? One reason: The actual figures do not appear in black
and white on any balance sheet. But it is possible to discover them.
Included in the annual Medicare Trustees' report are separate actuarial
estimates of the unfunded liability for Medicare Part A (the hospital
portion), Part B (medical insurance) and Part D (prescription drug
coverage).
As
of the most recent Trustees' report in April, the net present value of
the unfunded liability of Medicare was $42.8 trillion. The comparable
balance sheet liability for Social Security is $20.5 trillion.
Were
American policy makers to have the benefit of transparent financial
statements prepared the way public companies must report their pension
liabilities, they would see clearly the magnitude of the future
borrowing that these liabilities imply. Borrowing on this scale could
eclipse the capacity of global capital markets—and bankrupt not only
the programs themselves but the entire federal government. (Z: does anybody think entitlement seekers would care? Do they THINK?)
These
real-world impacts will be felt when currently unfunded liabilities
need to be paid. In theory, the Medicare and Social Security trust
funds have at least some money to pay a portion of the bills that are
coming due. In actuality, the cupboard is bare: 100% of the payroll
taxes for these programs were spent in the same year they were
collected.
In
exchange for the payroll taxes that aren't paid out in benefits to
current retirees in any given year, the trust funds got nonmarketable
Treasury debt. Now, as the baby boomers' promised benefits swamp the
payroll-tax collections from today's workers, the government has to
swap the trust funds' nonmarketable securities for marketable Treasury
debt. The Treasury will then have to sell not only this debt, but far
more, in order to pay the benefits as they come due.
When
combined with funding the general cash deficits, these
multitrillion-dollar Treasury operations will dominate the capital
markets in the years ahead, particularly given China's de-emphasis of
new investment in U.S. Treasurys in favor of increasing foreign direct
investment, and Japan's and Europe's own sovereign-debt challenges.
When
the accrued expenses of the government's entitlement programs are
counted, it becomes clear that to collect enough tax revenue just to
avoid going deeper into debt would require over $8 trillion in tax
collections annually. That is the total of the average annual accrued
liabilities of just the two largest entitlement programs, plus the
annual cash deficit.
Nothing
like that $8 trillion amount is available for the IRS to target.
According to the most recent tax data, all individuals filing tax
returns in America and earning more than $66,193 per year have a total
adjusted gross income of $5.1 trillion. In 2006, when corporate taxable
income peaked before the recession, all corporations in the U.S. had
total income for tax purposes of $1.6 trillion. That comes to $6.7
trillion available to tax from these individuals and corporations under
existing tax laws.
Z: Anybody think Romney wouldn't have at least tried to do something about this? Is Obama? Do tell.
Man, this is scary as hell.
Z
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