The real national debt is far worse than you think, critics say
Goodbye fiscal cliff, hello debt ceiling.
With the U.S. government now poised to hit a $16.4 trillion legal federal debt barrier, another fiscal and constitutional crisis looms. Nobel laureate economist Paul Krugman has called for a $1 trillion coin. Others think the coin idea is absurd. Last week, the Obama administration, after dancing around it for days, officially disavowed it.
But still others think the coin idea simply misses the point.
“Congress doesn’t even know what the real numbers are,” said Rep. Jim Cooper, D-Tennessee. “The real national debt isn’t $16 trillion. I wish it were that low. The real national debt is closer to $60 or $80 trillion.”
“The federal government is the last accounting-free zone in America,” Cooper said.
Cooper belongs to a small but vocal band of policy advocates who argue that the entire fiscal reform debate ignores the scope of unworkable promises made to one generation and unbearable burdens placed on the next.
That chorus includes two former GOP congressional leaders, Christopher Cox and Bill Archer, who in November published an op-ed article in the Wall Street Journal calling for “real accounting.”
“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,” Cox and Archer wrote. “But it does not include the unfunded liabilities of Medicare, Social Security and other outsized and very real obligations.”
The trouble, critics argue, is that the government uses “cash accounting” for its largest liabilities — which mean they only score Medicare and Social Security obligations on the books as debt as payments come due.
Real accounting — the “accrual accounting” used by private industry — scores debt burdens the moment obligations are made.
The IRS does not allow any corporation that makes more than $5 million to use cash accounting, said Sheila Weinberg, who heads the Institute for Truth in Accounting, “because it is so unreliable and possibly misleading.”
ITA is a nonpartisan advocacy group that lobbies to change the way state and federal governments do their bookkeeping. Over the years, Weinberg has been a close ally of Cooper on this issue.
Cooper, a Democrat, says that both parties are fully culpable. Bush administration officials in 2007 and 2008 blocked a push to put social insurance obligations on the federal books. And Cooper calls the 2003 Medicare prescription drug benefit, a pet project of Bush adviser Karl Rove, “quite possibly the worst piece of legislation in American history.”
At the Institute for Truth in Accounting’s website, two debt clocks rapidly click upward. The official clock listed now exceeds $16.5 trillion, already past the legal ceiling. The other clock is labeled “The Truth.” That clock now stands at more than $72.5 trillion.
“If we had good financial statements,” said Michael Scott, a veteran of the Treasury and the Security Exchange Commission, “you would understand that every plan that exists today — whether Simpson-Bowles, or Paul Ryan, or others — does nothing to balance the budget on a fully costed, accrual basis.”
No free goods
Until 1990, private management teams “would give labor generous pensions and post-retirement benefits because they saw these as free goods,” said Scott, who has worked extensively with both private companies (United Airlines) and public entities (the Postal Service) to restructure fiscal failure.
Corporations stressed for cash, he said, would make vague promises payable in the distant future and leave them off the books. “But once they started to put it on the balance sheet and had it flow through the income statement, people started to see how expensive the benefits were.”
In 1990, accounting standards for private business changed, requiring them to put pensions and post-retirement health care on their books. “This caused enormous problems for companies like Ford, Chrysler, the legacy airlines and the steel industry,” Scott said, leading to several bankruptcies and even radical pension restructuring in the private sector.
But for the government, loose accounting continues.
Like Cooper, Scott sees the 2003 Medicare prescription drug benefit, which narrowly passed with Republican support, as a watershed moment in fiscal irresponsibility.
Both the Congressional Budget Office and the Office of Management and Budget, which answers to the White House, priced the bill at $395 billion over a 10-year window, Scott said. But the Medicare actuaries, whose job is to predict the future using today’s data, looked at the same bill and decided that over 75 years it was a $16.6 trillion unfunded liability.
The unfunded liability is the amount of unpaid bills that would remain if current tax and benefits policies continued without change.
"Would a congressman have voted for it if the price tag had said $16.6 trillion?” Scott asked.
A mild-mannered accountant, ITA’s Sheila Weinberg has been fighting the budget transparency battle since the 1990s, when she realized that both parties were making promises they could not fulfill. In 2000, she became incensed when Al Gore wanted to put the budget “surplus” into a lockbox, while George W. Bush wanted to return it to the voters.
“What surplus?” Weinberg asked.
Weinberg really gets piqued when members of Congress “guarantee” Social Security benefits. “It’s a crime to promise people benefits and then not put money aside to pay those benefits,” said Weinberg. In fact, she notes, Social Security by law cannot make payments once the money has run out.
Last year, Weinberg catalogued 42 such “guarantees” on congressional websites. “Social Security benefits may be modest,” reads the website of Rep. Jan Schankowsky, D-Illinois, “but they are guaranteed — unlike retirement savings lost in the Great Recession.”
House Ways and Means Committee Chairman Sander M. Levin, D-Missouri, issued a similar statement on the 75th anniversary of the Social Security Act. "On this 75th Anniversary, millions of Americans can attest to the strength, and value, of Social Security’s guaranteed benefits,” Levin said.
If Weinberg had her way, Levin, Schankowsky and scores of other representatives and senators would be taken to the woodshed for “guaranteeing” to taxpayers benefits the federal financial statements view as not binding obligations.
The real numbers are hiding in plain sight, but to find them you have to look in the fine print of the “Nation By the Numbers” table in the federal government’s Consolidated Financial Statement.
That table shows “total liabilities” of $17.5 trillion in 2011, which combines debt held by the public and binding commitments to veterans and federal employees. But underneath that line in smaller font is a line for social insurance. That item adds $33.8 trillion to the tab. Another miscellaneous line adds $6.4 trillion.
“If you want to see what the total burden that every child born has to pay his share of, it’s the $17.5 trillion plus the $33.8 trillion plus the $6.4 trillion,” said Hal Steinberg, a member of the Federal Advisory Accounting Standards Board, which sets federal accounting standards.
Even the $33.8 trillion is hotly disputed, as auditors, who want real bookkeeping, find themselves at odds with bureaucrats, who want lower numbers.
The 75-year unfunded liability for total social insurance liabilities in the federal financial statement are pegged at $30.9 trillion in 2010 and $33.8 trillion in 2011 — both a huge drop from 2009, when the burden stood at $45.9 trillion. Why the sudden drop?
The reason, Steinberg said, is that “The Affordable Care Act is assuming there will be tremendous savings in Medicare costs,” savings won through “productivity gains” and by slashing doctors’ fees.
But many experts doubt either of these savings will materialize, and among the skeptics are Medicare’s own actuaries and the external auditors. “The numbers through 2009 got an unqualified opinion from the auditors,” Steinberg said. “In 2010 and 2011, the auditors had to qualify their opinion, because the actuaries said that they did not think those cost projections would necessarily hold up.”
A letter from Medicare actuaries in May 2011 said, “In our view, the scheduled physician payment reduction is implausible and there is a strong likelihood that the productivity adjustments will not be sustainable in the long range.”
Medicare and Social Security obligations are not included alongside veterans and employee benefits in national debt figures, Steinberg said, because FASAB has determined that Social Security and Medicare are not binding commitments.
“Current law says that when the Social Security trust fund runs out of money, which would be in the year 2033, they are prohibited by law to continue to make payments of the full amount," Steinberg said. "They can only make payments to the extent that they have contributions coming in."
“There is no exchange transaction here,” Steinberg said, as when an employee works in exchange for guaranteed benefits. In essence, Social Security is a government benefit that can be changed at any time. And because there is no contract to break, there is no accounting liability.
“When the (FASAB) board was looking at the best way to report this,” Steinberg said, “the feeling was not to put this on the balance sheet as a liability. It really wasn’t a liability.”
Perhaps equally to the point, he added, “The number would end up being so large that no one would be able to relate to it.” For both reasons, Steinberg said, FASAB chose to separate the social insurance liabilities in a separate location in the report.
Weinberg at the Institute for Truth in Accounting said she could live with scoring Medicare and Social Security off the books, but only if policy leaders made it clear there is no commitment.
She gets her hackles up when policymakers try to have it both ways, treating these programs as sacred promises for political gain — but hiding the cost in the books.
Weinberg said the no-promises-day-to-day approach would work if a few criteria were met. Payroll taxes should be treated as a “tax,” she said, not a “contribution.” Politicians and government officials must stop referring to “trust funds” and “guarantees.” If they do, she wants it legally treated as fraud. Personalized annual Social Security statements must no longer be mailed to taxpayers. Finally, Weinberg wants a serious education campaign undertaken to correct the record in taxpayers’ minds.
Weinberg is not holding her breath. “Politicians aren’t stupid,” she said. “They do these books on a cash basis because they don’t want to increase the deficit but they want to get re-elected.”
Eric Schulzke writes on national politics for the Deseret News. He can be contacted at email@example.com.
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