Why $16 Trillion Only Hints at the True U.S. Debt

November 30, 2012

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, say Chris Cox, a former chairman of the House Republican Policy Committee and the Securities and Exchange Commission, and Bill Archer, a former chairman of the House Ways & Means Committee.

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 percent of gross domestic product (GDP)), and the 2012 budget deficit of $1.1 trillion (6.97 percent 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 percent of GDP.
  • For the year ending December 31, 2011, the annual accrued expense of Medicare and Social Security was $7 trillion.
  • 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).

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.

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.

Source: Chris Cox and Bill Archer, "Why $16 Trillion Only Hints at the True U.S. Debt," Wall Street Journal, November 26, 2012.

 

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