Monday, June 13, 2005

The overlooked $2,300 billion deficit upper

And you thought half a trillion was bad...

"... Blessed by historical habits that have no relationship to what our government does today, our legacy of cash accounting now serves to mislead and confuse. The April issue of Economic Indicators, a publication prepared by the Council of Economic Advisers, for instance, projects a unified budget deficit -- the one that lumps the Social Security surplus in with the rest of government -- of $427 billion. (New reports this week that we may be on track for a smaller deficit don't change the fact that the accounting methods are misleading. We'll stick with the $427 billion figure until they make the new estimate official in midsummer.)

The $427 billion deficit, however, is a massive understatement of our true deficit. The real deficit is $2.3 trillion larger. That's more than five times the publicly discussed $427 billion figure -- but it never enters public discussion.

If the executive branch of government were held to the standards of Sarbanes-Oxley, it would be on a fast track to a criminal trial. We would forget about Ken Lay because the crimes at Enron are mere rounding errors compared to what our government does.

A bipartisan problem
Some readers will expect a diatribe against President George W. Bush to follow.

It won't.

This is a bipartisan problem. Both the Democrats and the Republicans, in or out of office, have been using accounting methods that are, at best, quaint and, at worst, criminal. And they have been doing it for decades.

You can understand what's going on by comparing our government to a large corporation like General Motors.

When General Motors (GM, news, msgs) files its annual report, it must report on the condition of its pension fund and other obligations to current and retired workers as well as its profit or loss. If the pension liabilities -- the retirement benefits it has promised workers -- exceed pension-plan assets by more than a certain amount, General Motors must make contributions to the pension fund, reducing its profits. The two, profits and pensions, are deeply linked. General Motors also has substantial health-care obligations to its retired workers.

Sound familiar?

Our government is in a similar position -- but with a lot more zeros on the numbers it uses. It reports its annual profit and loss as a surplus or a deficit. Separately, it reports on its long-term pension, disability and health-care obligations. Unlike General Motors, however, the government doesn't include these figures in the annual statements of surplus or deficit.

The buried details
You can find them only in the trustees' reports for Social Security and Medicare.

The 2005 reports (each over 200 pages) show the programs to be underfunded by a total of $33.7 trillion (in today's dollars) over the next 75 years. That's four times the $8 trillion in formal debt shown in regular government accounting.

You learn still more when you compare the 2005 reports with the reports from 2004. In 2004, the combined unfunded obligations of Social Security and Medicare were $31.4 trillion.

That's an increase of $2.3 trillion in a single year. The trustees' examination of the plans over a longer time period, termed the infinite horizon, shows an even larger change, $7.2 trillion (see table below).

But let's not look so far in the future. Let's stay with the traditional (if inadequate) 75-year measure, that $2.3 trillion. It isn't mentioned in other government documents. It is missing from Economic Indicators. Indeed, it is absent from virtually all discussion of the federal budget -- the one currently estimating a piddling deficit of $427 billion for fiscal 2005.

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