The Time To Pay The Piper Is Fast Approaching

01Every year the Treasury and the White House are required by law to report on the overall financial position of the federal government.   The same law requires the Government Accountability Office (GAO) to audit the report, which is then published in the Financial Report of the United States Government. Unlike the President’s yearly federal budget which primarily uses cash accounting, this yearly report is based on accrual accounting.

Under the cash method, more commonly used in small business, income is not counted until it is actually received, and liabilities [expenses] are not counted until they are actually paid. Accrual accounting, however, requires that measures of financial commitments are recorded when they are actually earned and measures of liabilities recorded when they occurred.  The federal government requires large corporations to use accrual accounting because it is the most relevant and reliable way to measure their long-term financial health.

While neither method will give you a 100% accurate picture of the government’s finances, the media and politicians generally cite only the federal budget because it provides them cover and hides the long-term viability of the government’s finances.

According to this year’s report, the government has amassed $74 trillion in debts, liabilities and unfunded Social Security and Medicare obligations. That amounts to $603,000 for every household in America, a fiscal burden that exceeds 90% of all the private wealth accumulated in the history of America. The actual burden may be even worse because this estimate is based on assumptions that are at best shaky and optimistic.

The government also owes $6.7 trillion in pensions and other benefits to federal employees and veterans, liabilities that didn’t appear in the 2014 budget. Paying the $6.7 trillion would require an average of $54,000 from every household in the U.S.

A similar situation exists with Social Security and Medicare. There are no trust funds set aside to pay either Social Security or Medicare.   Both are funded from taxes collected from current workers who will never receive benefits.   These programs differ from actual pensions because, according to a 1960 Supreme Court ruling, the government can change the deal at will. Yep, that’s right, the government can shut down both anytime they so choose.

Government quantifies the unfunded obligations of Social Security and Medicare in several different ways but only one approximates the concept of accrual accounting; the “closed group obligation,” which is the money needed to cover the shortfalls for all current taxpayers and beneficiaries in these programs. In the words of Harvard Law School professor, and federal budget specialist Howell E. Jackson, this “measure reflects the financial burden or liability being passed on to future generations.” These burdens amount to $25.4 trillion for Social Security and $28.2 trillion for Medicare.

Again, this is only an estimate and perhaps not a very good one. A paper in the journal Demography found that the Social Security Administration is using an antiquated method to project life expectancies and as a result the program may be in a considerably more precarious position that officially reported.  The 2014 Medicare Trustee Report stated that long-term costs may be “substantially higher” than projected because ObamaCare will cut Medicare prices for many healthcare services to “less than half of their level” under prior law which could cause doctors to quit serving Medicare patients, and force lawmakers to raise prices thereby increasing Medicare cost.

The current national debt is $18.2 trillion which is 103% of the nation’s gross domestic product.   This is higher than at any point in US history except for three years near the end of World War II. And to make matters even worse, it is measured on a cash basis which does not include most of the obligations detailed above.

These obligations are coming due – the piper is approaching. Under current federal policies and their economic efforts, CBO projects that the next generation will inherit a debt like never seen before in the history of the U.S., with negative consequences such as lower wages, poor economic growth, increased inflation, higher taxes, and reduced government benefits.

In the words of the GAO, “the costs of federal borrowing will be borne by tomorrow’s workers and taxpayers,” and this “may reduce or slow the growth of the living standards of future generations.”

Source:  Jefferson Policy Journal, James D. Agresti


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