Rep. Paul Ryan (R-WI) and the Republicans on the House Budget Committee point to a pair of publications from the Treasury Department and the Government Accountability Office that both show that the amount of unfunded liabilities going completely off the charts. I’ll focus on the GAO report, mostly because it is less than a tenth the size of the Treasury Department one, but also because the GAO can’t render an opinion on the bulk of the Treasury Department one because of “widespread material internal control weaknesses”.
Before I really delve into the GAO’s January 2010 update on “The Federal Government’s Long-Term Fiscal Outlook”, I have to briefly explain the two major scenarios they use; the “Baseline Extended” and the “Alternate”. Both are based on the Congressional Budget Office’s January 2010 10-year baseline. The major difference on the revenue side is the Baseline Adjusted assumes that the expiring tax cuts (both Bush’s and Obama’s) expire on schedule and the Alternate Minimum Tax does not get indexed for inflation (the indexing currently must be done by Congress yearly), then continue to be at 20.2% of GDP (the 2020 level) after 2020, while the Alternate assumes that the tax cuts continue through 2020 and the AMT continues to be indexed through 2020, then adjust to the 40-year historical average of 18.1% of GDP. On the spending side, unlike the Baseline Extended, the Medicare “Doc Fix” (again, done by Congress yearly) continues to be done, the refundable portion of tax credits due to expire don’t through 2020, and discretionary spending goes up at the rate of economic growth (or a constant 8.7% of GDP, versus the Baseline Extended assumption of going up by the rate of inflation through 2020 then remaining at 6.7% of GDP).
Under the Baseline Extended scenario, which the GAO notes has revenues higher than historical average and discretionary spending below historical average, the unfunded liability over the next 75 years is $41.1 trillion. That compares very unfavorably to the fall 2009 estimate of $36.1 trillion in unfunded liability. Of note, the GAO says that either taxes would immediately need to go up 24.2% and remain that much higher than their projections throughout the next 75 years, which would leave taxes at 25.3% of GDP by 2020, or discretionary spending be immediately reduced by 20.0% and remain down at that level throughout the next 75 years, to close that gap.
However, we know that government will not allow spending to grow by only the rate of inflation; hence the Alternate scenario is operative. The GAO notes that both revenues and discretionary spending under that scenario are roughly the same as their historical averages. Under that scenario, the unfunded liability over the next 75 years is $76.4 trillion. That’s right – a $1 trillion deficit every year for the next 75 years. That is also a $14.3 trillion increase in unfunded liabilities since last fall, when it was $62.1 trillion.
Some items of note from Ryan and the House Republicans on the Budget Committee:
- By 2020, roughly 93 cents of every dollar of Federal revenue will be spent on major
entitlement programs and net interest costs. - By 2030, net interest payments on the Federal Government’s accumulating debt will
exceed 8 percent of gross domestic product [GDP] – making them the largest single
expenditure in the Federal budget. - To close the fiscal gap today, the government would have to immediately raise taxes by
50.5 percent (note, that would raise the tax take beyond 2020 to 27.2% of GDP), or cut non-interest spending by 34.2 percent. - If no action is taken in the next 10 years, in 2020 the government would have to raise
taxes by 60.7 percent (or to 29.1% of GDP), or cut noninterest spending by 40.2 percent
Figures 3 and 4 in the GAO report, which outline revenues and composition of spending under the Baseline Extended and Alternate scenarios respectively, are must-sees. Even under the Baseline Extended model, spending on interest, Social Security, Medicare and Medicaid will exceed total revenues by 2040. It’s worse under the Alternate scenario – the major entitlements and interest will exceed total revenues long before 2030, and Social Security alone plus interest will exceed total revenues in 2040.
For those of you who think that the problem is low revenues, I decided to mash the Baseline Extended revenue projection into the Alternate spending chart, which is the most-likely scenario given that the majority of “Republican” Senators refused to find $10 billion in a $3,600 billion budget to cut to pay for a month’s worth of additional unemployment benefits.
Thanks so much for blogging on this topic. There are way to few that even know about it. And, even though ALL our elected officials know about it, they behave as if it doesn’t exist: Their current Healthcare proposal = Case Closed.
One point though about your post: Things are MUCH worse than your “$1 trillion deficit every year for the next 75 years” implies, because the GAO’s $76.4T is PRESENT VALUE. i.e. all 75 years of deficits DISCOUNTED to today equals the $76.4T.
Also, comparing our unfunded liabilities against GDP is extremely misleading, as no one can personalize their personal devastation. Try this instead:
$76.4T is conservatively 30 times the size of the federal revenues of $2.5T. Federal revenues are primarily funded by annual social security and income taxes. So then, how is every taxpayers portion of the unfunded liabilities not 30 times what they pay annually in social security and income taxes? Due TODAY! 30x!?!?
The majority of the unfunded liabilities are Medicare, and we’re supposed to be weak-kneed at the current healthcare proposal that doesn’t even spit at the problem.
Would someone help raise the bar?
Point of order – I’ll submit that a lot of the elected officials don’t know about it. I’ll relate a story from my locale, Oak Creek, Wisconsin, a city of roughly 34,000. A bit over a year ago, an actuarial study was undertaken on the long-term liability of the self-funded health insurance the city has, and the actuaries stated there was a $63 million unfunded liability. Out of the 7 elected officials with the power to do anything about funding said liability, only two even knew the study existed, and the only one that had any concerns is now an ex-alderman.
The point that the $76.4T is in present-velue dollars is well-noted. I specifically did not compare the total unfunded liabilities versus total GDP because it is misleading. However, not all comparisons against GDP are misleading – the yearly comparisons are still quite valid, and frankly, quite frightening.
In fact, in terms of GDP, the CBO stopped calculating the publicly-held debt versus GDP once they predict it hits 200% GDP. That is somewhere between 2032 and 2051. That actually supports your calculation that the unfunded liability, in terms of today’s dollars, is 30 times total federal revenues.
At the same time, not all of that has to be funded at once. The bad news is exactly $0.00 is going to fund that. The worse is the unfunded liability is growing at something north of 10% per year.
Steveegg! I REALLY appreciate you blogging about and discussing this, as TOO FEW are yet aware. So please understand my comments are intended totally constructively.
I’m afraid I at best don’t understand your “At the same time, not all of that has to be funded at once.”?
Quite the contrary, that is the EXACT definition of present value. Isn’t the reason the “unfunded liability is growing at something north of 10% per year” exactly because of the time-value of money, inflation, and continued disbursements? The definition of “unfunded liabilities” is the Federal Debt, plus the present-value net of future anticipated expenses less income. We would have to have that $76 trillion set aside TODAY (or reduced by exorbitant future tax increases) for the liabilities to be considered “funded”. The lost interest from not having the money already set aside, inflation, and the actual disbursement of increasing benefits with borrowed money, are growing the number EVERY day we procrastinate dealing with the problem.
It should be noted that we are already past the tipping point. We would have to DOUBLE the budget, and therefor our taxes just to cover 5% INTEREST AND INFLATION on $76 trillion. And this wouldn’t even touch the liabilities themeselves. (And I’m still not even sure whether the $76T includes the $14T of current Federal debt.)
Granted, I’m pretty sure it’s IMPOSSIBLE for us to fund our unfunded liabilities all at once (as it’s nearly 5x our GDP). But to comprehend the severity of the problem, we must understand that that is exactly the kind of action that is required to address the issue, as not doing so is an even more expensive proposition.
Truly, the ONLY choice is massive Social Security, and Medicare et al benefit cuts, or the calamity of national default. If we let this bubble burst, how will it not make the dot-com and housing bubbles look like tiddly-winks?
The current debate and near term passage of obama care continues to ignore this huge issue. How can we expect to have leaders deal with this issue when they act as though they know nothing about it. Based upon their financial acumen it may well be true. But they have to be able to understand the concept and size of the issue to do the job one would think.
Does anyone estimate the unfunded liabilities from a proposal like the reconcilation health care bill or does the detail needed not exist at this point?
Numbers and percentages are so easy to manipulate, the hard truth is we have been sinking for years, the so called public debt doubled nuder Clinton, so much for his rosy economy, he allowed it to grow from 2.9T to 5.9T, Bush almost doubled it again to just under 10 Trillion, while Obama has taken it to 14 in just over a year, and Congress has no signs of slowing down on the spending of money it doesn’t have. But as already noted here the public debt is a drop in the bucket compared to the real total debt. The one thing that needs to happen most, taking away the Congressional credit card and forcing Congress to live within our means is not even being talked about, except by all the people AKA all the non-politicians in this country.
The whole thing is totally out of control and no one in Government the guts to do what needs to be done, yet alone a viable plan for the future.
Are we really so bad off that we can’t find any competent people to elect?
My prediction for the near and foreseeable future, Congress and the rest will keep on spending what they don’t have in ever increasing amounts, and their only solution will be to raise all existing taxes, and add lots of new taxes on our broken backs, until they take it all, every last penny and thing we have.
Then it could go so far wrong that China and the other holders will file for foreclosure, confiscate Fort Knox, and the rest of anything else they can sell off, maybe hold an auction or three, they might even sell off the land and our homes right out from under us, and that will be the end of the USA as we’ve known it.
My gut told me something was wrong with this country. The people I meet are so stupid and yet get paid so much. But then the taxes aren’t enough to run the country. The salaries I see and 50% tax rate if you add up all the taxes.
This country is in serious trouble people. We have rising unemployment, less revenue, and a President who prints money. Good bye USA and hello Russia, India, all the 3rd rate countries we are turning into.
The song God damn the pusherman. These politicians are God damn the US citizen. It makes me sick how they are so. The post about the politicians not even knowing the study existed. Sick and stupid.