President Trump’s signing of a two-year budget deal earlier this month may have averted the chances of another government shutdown before the 2020 election, but it certainly added to the exposure of U.S. taxpayers. According to recent Treasury reports, the deficit has risen to nearly $900 billion over the first 10 months of this fiscal year, a 27% increase from last year. The Trump administration is now expecting the deficit to reach more than $1 trillion for the year as a whole. A more holistic forecast of the increase in U.S. indebtedness exceeds $9 trillion for the same year. This is due in large part to growth in unfunded Social Security and Medicare liabilities.
The most widely reported measures of federal government deficits mislead Americans about the severity of our government’s fiscal problems. The annual budget deficit is reported according to cash basis accounting, which generally only includes the activity in the government’s checkbook. The growth in the amount of retirement benefits the government owes to our seniors and veterans is not included.
Because cash basis accounting does not provide a complete picture of an entity's revenues and expenses, the IRS does not allow a corporation that has revenues of more than $25 million to report their books on a cash basis. Yet Congress uses this method of accounting to calculate the more than $4 trillion budget. The budget deficit calculation does not include the growth in the Social Security, Medicare and veterans’ liabilities and Congress does not set aside enough money to pay the benefits promised.
This misleading accounting has been happening for more than 100 years. For example, in 2001 the Treasury reported the government ran a $127 billion cash basis surplus but the government was actually running a $4 trillion deficit. This “true” deficit includes the growth in unfunded Social Security, Medicare and veterans’ benefits. In 2010 the reported budget deficit was $1.3 trillion, but the true deficit was four times more at $5.5 trillion. Truth in Accounting is forecasting a $9 trillion true deficit, which includes a significant growth in unfunded Medicare benefits as calculated by the Medicare trustees.
In 2000 the true debt was $25.5 trillion. With average true deficits since then of almost $5 trillion, the true debt at the end of this fiscal year is expected to be a staggering $119 trillion.
This vast debt load eclipses the total net worth of all U.S. households! This means that even if all Americans signed over all of their net assets, including their cars, houses, stocks and bonds, to the U.S. Treasury, the federal government still would not have enough to cover all of the benefits seniors and veterans have been promised. Under current law and policies, the federal debt will continue to rapidly worsen, due in large part to the ever-increasing amount of unfunded Social Security and Medicare obligations.
It’s all the more galling that the recent deterioration in our public purse has come during a tailwind of positive economic growth and historically low interest rates. Turnarounds in either or both of these factors will add to our fiscal disaster. Fixing our government’s fiscal problems would require profound new legislation including very large tax increases and cuts to entitlements and other spending.
While Congress is unlikely to propose the massive changes needed, the federal government may be tempted to print money to pay necessary benefits, resulting in higher inflation. Inflation poisons real economic growth and will result in even higher Social Security and Medicare costs.
Consider the reasons our government has offered for not including unfunded Social Security and Medicare promises as liabilities on its balance sheet — that the government controls the law, and can change it at any time. Also, the securities “held” in the Trust Funds are debts the government says it owes to itself, not to anyone expecting Social Security benefits.
It’s as though the collective “we” are standing on a beach watching the water flow out to sea before the tsunami arrives. To move ahead, we must first overcome the obstacles of an unaware citizenry, an uninterested media and politicians unwilling to tackle such gigantic problems.
Chuck Chokel is former co-CEO of Progressive Insurance and current board member of Truth in Accounting, a nonprofit whose mission is to educate and empower citizens with understandable, reliable and transparent government financial information.