This piece came out in yesterday's Wall Street Journal, but its content is too important to let it glide past without sufficient amplification. Its authors are Chris Cox (a former Congressman and SEC Chairman) and Bill Archer (the former Chair of the House Ways and Means Committee). Both were members of President Clinton's bipartisan commission on tax and entitlement reform in 1994. As today's politicians bicker over the minutiae of a deal to avert the man-made disaster known as the "fiscal cliff," Cox and Archer warn that America is headed toward a far more dangerous precipice if our entitlement spending isn't responsibly and seriously reined in. Their piece explicates why the record-setting, eye-popping annual deficit and national debt figures that most Americans have heard about -- $1.1 Trillion and $16 trillion, respectively -- don't even approach capturing the magnitude of Uncle Sam's red ink. In short, the government is relying on budgeting gimmicks and practices that would land private sector accountants in jail:
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.
So what does a more complete picture of the government's unfunded liabilities (money spent or promised to be spent, that isn't paid for) look like? It ain't pretty:
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.
These are staggering, deeply concerning numbers. Our real national debt is approaching $87 trillion and counting, yet our leaders are squabbling tax hikes on "the rich" that would reap (at best) approximately $82 billion per year. Cox and Archer place the ignorance and folly of the "we have a revenue problem" crowd in stark relief:
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. In short, if the government confiscated the entire adjusted gross income of these American taxpayers, plus all of the corporate taxable income in the year before the recession, it wouldn't be nearly enough to fund the over $8 trillion per year in the growth of U.S. liabilities. Some public officials and pundits claim we can dig our way out through tax increases on upper-income earners, or even all taxpayers. In reality, that would amount to bailing out the Pacific Ocean with a teaspoon.
These figures underscore the profound and alarming lack of seriousness that has gripped our politics. The president prattles on about the "Buffett Rule" and "fair shares," but those associated revenues amount to mere snowflakes in the face of the biggest debt avalanche in history sliding down our national mountain. Sure, taxing the rich might make some people feel good (click here for an unvarnished articulation of liberals' class envy agenda), but it does absolutely nothing to fix the real problem. The Republicans have at least put a serious plan, with bipartisan origins, on the table to begin to address these issues. Democrats have screamed "no!" yet they continue to put forth no realistic, specific ideas of their own. Frustratingly, this cynical strategy has worked out pretty well for them at the ballot box in recent years, but at some point the jig will be up. I'm sure it will all be the Republicans' fault then, too, but unlike politicians and the media, the arithmetic doesn't lie.