A
decade and a half ago, both of us served on President Clinton's
Bipartisan Commission on Entitlement and Tax Reform, the forerunner to
President Obama's recent National Commission on Fiscal Responsibility
and Reform. In 1994 we predicted that, unless something was done to
control runaway entitlement spending, Medicare and Social Security would
eventually go bankrupt or confront severe benefit cuts.
Eighteen years later, nothing has been done. Why? The
usual reason is that entitlement reform is the third rail of American
politics. That explanation presupposes voter demand for entitlements at
any cost, even if it means bankrupting the nation.
A better explanation is that the full extent of the
problem has remained hidden from policy makers and the public because of
less than transparent government financial statements. How else could
responsible officials claim that Medicare and Social Security have the
resources they need to fulfill their commitments for years to come?
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 liabilitBuies
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.
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.
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.
These real-world impacts will be felt when currently
unfunded liabilities need to be paid. In theory, the Medicare and Social
Security trust funds have at least some money to pay a portion of the
bills that are coming due. In actuality, the cupboard is bare: 100% of
the payroll taxes for these programs were spent in the same year they
were collected.
In exchange for the payroll taxes that aren't paid out
in benefits to current retirees in any given year, the trust funds got
nonmarketable Treasury debt. Now, as the baby boomers' promised benefits
swamp the payroll-tax collections from today's workers, the government
has to swap the trust funds' nonmarketable securities for marketable
Treasury debt. The Treasury will then have to sell not only this debt,
but far more, in order to pay the benefits as they come due.
When combined with funding the general cash deficits,
these multitrillion-dollar Treasury operations will dominate the capital
markets in the years ahead, particularly given China's de-emphasis of
new investment in U.S. Treasurys in favor of increasing foreign direct
investment, and Japan's and Europe's own sovereign-debt challenges.
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. Only by addressing these unsustainable spending
commitments can the nation's debt and deficit problems be solved.
Neither the public nor policy makers will be able to
fully understand and deal with these issues unless the government
publishes financial statements that present the government's largest
financial liabilities in accordance with well-established norms in the
private sector. When the new Congress convenes in January, making the
numbers clear—and establishing policies that finally address them before
it is too late—should be a top order of business.
Mr. Cox, a former chairman of the House Republican
Policy Committee and the Securities and Exchange Commission, is
president of Bingham Consulting LLC. Mr. Archer, a former chairman of
the House Ways & Means Committee, is a senior policy adviser at
PricewaterhouseCoopers LLP.
