Monday, June 12, 2006

Unfunded government liabilities

The largest reason I became a Libertarian is out of control government spending. The government is growing each and every year and our government gets more and more involved in our lives each and every year.

One of the problems is the fact that the government uses cash accounting.

The government mandates that almost every business in the United States use accrual accounting; however, our own government does not use that method.

In recent years our Federal government has reported annual budget deficits of around 400 billion dollars. In simple terms, what this means is our Federal government has spent 400 billion dollars more then it has taken from us in taxes. The Federal government borrows this money and then we pay interest on it each and every year.

Last year we paid 184 billion dollars in Interest at The Federal level alone. That is almost three times the entire budget for Homeland Security!

When you use accrual accounting you have to track liabilities and promised payments and record them in the year they are promised. These liabilities stay on the books until they are paid.

No one knows exactly what the present value of our unfunded liabilities is. I have read several reports and the best guess is that we would have to have between 53 and 75 TRILLION dollars invested in government securities TODAY to pay all of the benefits that our elected officials have promised... For the purposes of the calculations I made below I have assumed they are 64 trillion dollars.

Instead, we have a massive National Debt. We have NOTHING invested to pay for these future promises.

We should switch to accrual accounting for the government. This would help force our elected officials to acknowledge that the promises they are currently making CANNOT be funded by our future taxpayers; it simply is not possible.

The below assumptions assume that all levels of Government grow by about 5% per year (Which is a much lower growth rate then our current elected officials are incurring) and that we enact the changes January 1st 2007. If we defer the implementation dates then the problem gets even worse.

We really only have three choices to fix the problems The Republicans and Democrats have created for our kids and grandkids:

1. Increase taxes. The tax increases would have to be immediate (Starting in January of 2007) and massive. According to the highly respected Tax Foundation the average American will pay 31.6% in taxes in 2006. This is a combination of all of the taxes that you pay. To pay for all of the current promises our government has made to Americans we would have to increase the overall tax rate to 56%. This is a tax rate similar to that of Socialist France. Can you imagine the response of Americans to seeing their taxes increasing by about 77% overnight? This is obviously not going to happen...

2. Decrease spending. If our government were to immediately (January 2007) cut in half all of the payments they make for entitlement programs we would be solvent. This would mean cutting social security payments in half, cutting payments to all government retirees in half, halving the amount the government pays for Medicare and Medicade, etc. Can you imagine the response from all of the people currently collecting these payments? This is obviously not going to happen.

3. A combination of the above including "means" testing and raising the retirement age. My guess is that our government will NOT decide to fix the problems they have created. I would guess that by about 2016 everything will come to a head.

In 2016 we will be paying almost half a trillion dollars of interest on The Federal Debt. I do not even want to think about what this will do to interest rates.

I would also guess that our government will keep increasing spending on a variety of programs between now and 2016. I am sure they will not cut any major programs and I do not think they will increase taxes. This means that we will have unfunded liabilities that are MUCH larger then they are today. I would guess they will be in the neighborhood of 64 - 104 trillion dollars. I would guess around 84 trillion dollars if I had to guess. This would mean that we would have to increase taxes to about 62% (Higher then Socialist France) or cut all entitlement payment to about 38% of the promised amount.

I think that there will be a large public backlash against both The Reps and Dems in 2016...

Once again, our Government will not make the needed changes. Instead they will tinker with everything. My guess is that they will do the following:
1. Increase the retirement age to 70 for Social Security. This will lower spending on the program somewhat.
2. "Means Test" Social Security. In other words, the rich and those middle classed and poor people who saved money and invested in their retirement rather then spend that money will be punished and will not receive Social Security. This will lower spending on the Social Security program somewhat.
3. Remove the cap on paying taxes into Social Security. This will increase the revenue brought into the social security system.
4. Make other minor changes, increase some taxes, cut some spending.

I am worried for my kids...

Mike Sylvester

5 comments:

Robert Nanders said...

Frankly, I hope things DO come to a head. A major financial crisis might shake things up in Washington - but unfortunately, probably just in the direction of socialism.

William Larsen said...

Mike,

My calculations show the Social Security Old Age Survivors program to have a $16.5 Trillion present value liability. Years ago people reported it to be $20 Trillion, when I estimated it to be closer to $9 Trillion. I have stuck with my model and in the past few years the Social Security Administration has basically began agreeing with my numbers, as have others.

Medicare serves 36.5 million at a cost of $6,200 a year. I calculate the present value of this benefit is $117,735 for a 65 year old. A back of the envelope calc would put the cost $2.7 Trillion. Based on accrual accounting I would estimate Medicare’s present value liability to be about $11.2 Trillion tops.

The RX drug program is worth about $2,000 per senior or for a 65 year old $37,000 present value. Without having any real data to go on I would put this present value cost at $3.7 Trillion.

The national debt is about $8.6 Trillion. The only other liabilities are federal pensions.

Total liabilities would be $40 Trillion. As you pointed out we are looking at some huge numbers.

It is immoral and un-American to borrow money, reap the benefits and give the bill to our children.

LP Mike Sylvester said...

You have been looking at this stuff longer then I have Bill. I do not have my own model...

Based on you infomration I would say that current liabilities are:

40 Trillion according to Larsen

53 Trillion according to USA today (IN 2004)

70-75 Trillion according to The Heritage Foundation

So maybe I should say the current unfunded liabilities are 40 -75 trillion rather then 53 - 75 trillion...

In reality, the difference is not that great!

We are in trouble...

Mike Sylvester

Robert Enders said...

I hope that the crisis is averted. Nanders, you should realize that people rarely behave rationally or responsibly during a crisis. Personally, I hope for good economic times no matter who is in power. But I stand prepared for the times when I can say "I told you so."

William Larsen said...

Mike,

The Heritage Foundation in my opinion has always over estimated the size of liabilities. In my opinion $70 Trillion is no worse than $40 Trillion and it is no worse then $30 Trillion simply because we cannot afford the $16 Trillion in Social Security OASI liabilities we currenlty have let alone the others.

If helped had arrived one hour sooner to the Titanic, would it have made any difference? The sizes of the liabilities are staggering.

What I was attempting to do was divide how this staggering number might have been arrived at. I hoped breaking down the number into separate entities that each of us might be familiar with would help. We will all at some point in the near future have to decide, which program to cut and by how much. Everyone should be thinking about what is more important Social Security Old age Benefits, Medicare which spends 2/3 of its funds to cover costs in the last month of life or Rx drugs?

Is it better to live a quality life with little healthcare or a poor quality life with good healthcare once you get sick? Good job Mike for brining this to light.