Somber Yet Clear U.S. Financial Report Should Be Required Reading For All Citizens

March 2008

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The U.S. federal government recently released “The Citizen’s Guide to the 2007 Financial Report of the United States Government”. This is the first time that the federal government has released this type of summary. It is remarkably candid and clear. It paints a picture that should have received greater attention already, and deserves a place in the upcoming presidential election race.

In a press release that accompanied the report, Comptroller General of the GAO, David Walker said:

"Unless the government makes fundamental changes in its budget, entitlement, discretionary spending and tax policies, and soon, the coming surge of spending on Social Security and Medicare will bring a fiscal tsunami of spending and debt that threatens to swamp our ship of state, damaging the U.S. economy,"

Current Revenues and Spending

Taxes (revenues) have been healthy and growing. Between 2003 and 2007, revenues grew by 46% to $2.6 trillion. The growth was largely because of increasing personal income and corporate taxes.

At the same time, the government’s total operating cost remained fairly constant. On the spending side, the Department of Health & Human Services (HHS), the Department of Defense, the Social Security Administration, and interest of government debt comprises three-quarters of the government’s total net cost. Over 80 percent of HHS’s cost is for Medicare and Medicaid.

The combination of these growing revenues and stable costs resulted in drops in the federal deficit over the last few years, although the budget deficit remains high.

Federal Debt

The U.S. government interest-bearing debt is around $9 trillion, consisting of $5 trillion of public debt (Treasury securities), and $4 trillion of intergovernmental debt from Social Security and other trust funds.

Every citizen’s share of this debt is over $17,000. Nearly half of the federal debt is owned by foreign countries, so a substantial portion of government interest payments go abroad.

The U.S. government’s assets are $1.6 trillion. After considering non-interest bearing debt (like required environmental cleanup costs), the government’s liabilities exceed its assets by $9.2 trillion. Putting this into personal or corporate terms, the federal government is insolvent by over $9 trillion.

The Future is a “Train Wreck”

Entitlement spending dominates the future story. On this point, the report is amazing transparent and foreboding. Here are some examples:

“The government faces a huge fiscal challenge in the years ahead. This year, 2008, is the year in which the first of the approximately 80 million baby boomers – those born between 1946 and 1964 – become eligible to draw Social Security benefits. Scheduled Social Security and Medicare benefits together with other federal programs projected long-term cost are much greater than the resources (revenue and borrowing) available to pay for them. Unless action is taken to bring program cost in line with available resources, the coming surge of entitlement spending will end in a fiscal train wreck that will have an adverse effect on the U.S. economy and on virtually every American.”

Revenue as a percent of Gross Domestic Product (GDP) has been roughly constant at around 18 percent. Although revenue is expected to stay at this level, spending on Medicare, Medicaid and Social Security is expected to grow dramatically. This is shown in the following chart:

Although interest is a large cost component in the above chart, the challenges are not solely caused by interest. Even if interest were completely eliminated (of course, this is not possible), then revenues (the black line) are still insufficient to pay for unaltered entitlement spending. The sooner one addresses this underlying issue, the sooner the interest portion of the above chart can return to normal levels.

The report describes this situation as follows:

“The projected growth in spending for Social Security and Medicare benefits affects every citizen in the nation. Scheduled benefits under these programs are expected to exceed dedicated revenue (e.g., payroll taxes and premiums) by more than $40 trillion (present value) over the next 75 years under current laws and policy. The fiscal imbalance is even larger looking beyond 75 years.”

Assuming the additional spending occurs and is financed by additional debt, U.S. government debt levels will become unmanageable. As a percentage of GDP, public debt hit an all-time high during World War II. Here is what the government indicates will occur unless entitlement program changes are made:

The report describes this situation as follows:

“These combined trends will cause government debt levels to more than triple by 2040 and to more than double again by 2080. This far exceeds the historic high of 109 percent of GDP that occurred during World War II.

The nation must change course before the deficit and debt reach unprecedented heights. The government must bring program cost in line with available resources. Delays in taking this action will increase the magnitude of the reforms needed and will place more of the burden on our children and grandchildren.”

Based on the above, younger readers will never get Social Security benefits under the current benefit schedules. If you are curious as to what you will be missing, or if you are old enough to get benefits before the politicians can not longer ignore this problem, here is a Social Security benefit calculator.

Government Accountability Remains Out-of-Control

The Government Accountability Office (GAO) is responsible for auditing the U.S. Government’s financial statements. For fiscal 2007, for the eleventh straight year,

“GAO again issued a disclaimer on the financial statements. This means that the auditors did not have sufficient information to determine whether the financial statements were reliable. Material weaknesses in internal control and other scope limitations resulted in conditions that prevented GAO from forming and expressing an opinion.”

These conditions would not be tolerated in a private enterprise.

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Whichever presidential candidate addresses (or maybe just acknowledges) these issues will likely get this reader’s vote.

Fulcrum Inquiry performs forensic accounting and litigation consulting services.