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Oops! U.S. Debt Almost $100 Trillion

Back on July 22 I wrote a post about a San Francisco Chronicle article which stated the U.S. government is $53 trillion in debt (factoring in long-term liabilities), which translates to $455,000 per U.S. household.

Turns out, the situation might be worse. A lot worse. To the tune of $99.2 trillion, to be exact.

On August 7, a piece appeared on LewRockwell.com referencing a speech about the debt by Richard W. Fisher, the President and Chief Executive Officer of the Federal Reserve Bank of Dallas. Fisher told the Commonwealth Club of California in San Francisco back in May:

In the distance, I see a frightful storm brewing in the form of untethered government debt. I choose the words—“frightful storm”—deliberately to avoid hyperbole. Unless we take steps to deal with it, the long-term fiscal situation of the federal government will be unimaginably more devastating to our economic prosperity than the subprime debacle and the recent debauching of credit markets that we are now working so hard to correct.

How did the head of the Dallas Fed come up with a number like $99.2 trillion? First, he accounted for Social Security liabilities:

Now, fast forward 70 or so years and ask this question: What is the mathematical predicament of Social Security today? Answer: The amount of money the Social Security system would need today to cover all unfunded liabilities from now on—what fiscal economists call the “infinite horizon discounted value” of what has already been promised recipients but has nofunding mechanism currently in place—is $13.6 trillion, an amount slightly less than the annual gross domestic product of the United States.

Then, he worked out Medicare entitlements:

Please sit tight while I walk you through the math of Medicare. As you may know, the program comes in three parts: Medicare Part A, which covers hospital stays; Medicare B, which covers doctor visits; and Medicare D, the drug benefit that went into effect just 29 months ago. The infinite-horizon present discounted value of the unfunded liability for Medicare A is $34.4 trillion. The unfunded liability of Medicare B is an additional $34 trillion. The shortfall for Medicare D adds another $17.2 trillion. The total? If you wanted to cover the unfunded liability of all three programs today, you would be stuck with an $85.6 trillion bill. That is more than six times as large as the bill for Social Security. It is more than six times the annual output of the entire U.S. economy.

Fisher adds it all up, and, voila:

Add together the unfunded liabilities from Medicare and Social Security, and it comes to $99.2 trillion over the infinite horizon. Traditional Medicare composes about 69 percent, the new drug benefit roughly 17 percent and Social Security the remaining 14 percent.

And just to make his prediction a little bit more personal:

Let’s say you and I and Bruce Ericson and every U.S. citizen who is alive today decided to fully address this unfunded liability through lump-sum payments from our own pocketbooks, so that all of us and all future generations could be secure in the knowledge that we and they would receive promised benefits in perpetuity. How much would we have to pay if we split the tab? Again, the math is painful. With a total population of 304 million, from infants to the elderly, the per-person payment to the federal treasury would come to $330,000. This comes to $1.3 million per family of four—over 25 times the average household’s income.

Somehow, $455,000 per household seems a lot more manageable at this point…

Source:

“Storms on the Horizon: Remarks before the Commonwealth Club of California”
Richard W. Fisher
Federal Reserve Bank of Dallas, May 28, 2008

I.O.U.S.A.

For those of you looking for some feel-good cinema this summer, you may want to pass on the movie “I.O.U.S.A.,” which debuts August 21. Frank Ahrens of the Washington Post wrote Thursday:

A private-equity billionaire, a former federal government official and a Baltimore newsletter editor have made a documentary film that they hope can do what an endless parade of policy papers has not: Persuade Americans that debt has created a looming economic crisis that would make the Great Depression look like a market correction.

The movie, “I.O.U.S.A.,” debuting Aug. 21, is an 87-minute alarum on what it calls the tsunami of debt bearing down on the United States’ future, caused by the rising national deficit, the trade imbalance and the pending costs of baby boomers cashing in on entitlements…

The film will debut in 400 theaters around the country on Aug. 21, followed by a live video town hall meeting from Omaha, featuring Walker, Peterson and Buffett. The next day, the film opens in 10 cities, including Washington.

From the movie’s website:

Wake up, America! We’re on the brink of a financial meltdown. I.O.U.S.A. boldly examines the rapidly growing national debt and its consequences for the United States and its citizens. Burdened with an ever-expanding government and military, increased international competition, overextended entitlement programs, and debts to foreign countries that are becoming impossible to honor, America must mend its spendthrift ways or face an economic disaster of epic proportions.

Throughout history, the American government has found it nearly impossible to spend only what has been raised through taxes. Wielding candid interviews with both average American taxpayers and government officials, Sundance veteran Patrick Creadon (Wordplay) helps demystify the nation’s financial practices and policies. The film follows former U.S. Comptroller General David Walker as he crisscrosses the country explaining America’s unsustainable fiscal policies to its citizens.

With surgical precision, Creadon interweaves archival footage and economic data to paint a vivid and alarming profile of America’s current economic situation. The ultimate power of I.O.U.S.A. is that the film moves beyond doomsday rhetoric to proffer potential financial scenarios and propose solutions about how we can recreate a fiscally sound nation for future generations.

I know where I’ll be August 21…

Trailer, “I.O.U.S.A.” (2008)
YouTube Video Link

Source:

“Indebted Ever After”
Frank Ahrens
Washington Post, August 7, 2008

America’s Debt? $455,000 Per Household

Yup. You heard right. The U.S. government is $53 trillion in debt, factoring in long-term liabilities. This translates to $455,000 per U.S. household. The San Francisco Chronicle’s Carolyn Lochhead wrote last Thursday:

As the Bush administration proposes backstopping mortgage giants Fannie Mae and Freddie Mac with a $300 billion line of credit and Congress contemplates another economic stimulus, the question is who will bail out the government?

“People seem to think the government has money,” said former U.S. Comptroller General David Walker. “The government doesn’t have any money.”

A rare consensus has developed across the political spectrum that the government’s own fiscal affairs are precarious, with an astonishing $53 trillion in long-term liabilities, according to the Government Accountability Office.

To put that number in human terms, the debt has reached $455,000 per U.S. household. As that debt grows, the United States increasingly relies on foreigners, including China and Middle East oil producers, for financing.

“The factors that contributed to our mortgage-based subprime crisis exist with regard to our federal government’s finances,” said Walker, now head of the Peter G. Peterson Foundation, a group established to raise alarms about the nation’s budget. “The difference is that the magnitude of the federal government’s financial situation is at least 25 times greater.”

According to Lochhead, the federal government’s finances are in worse shape than annual budgets show. This is due to the U.S. government not being required to state its long-term obligations. And the situation is about to become a crisis. She wrote:

This year’s presidential election coincides with the first retirements of the 78 million people born between 1946 and 1964. The first of this Baby Boom generation may now collect Social Security. In three years, they will join Medicare, the giant health care program whose finances are commonly described as out of control. Medicare accounts for the bulk of the nation’s long-term liabilities.

According to the Chronicle, current liabilities total $6.7 million for Social Security and $34.1 trillion for Medicare.

When will the financial meltdown occur? According to Kent Smetters, an economist at the Wharton School of Business at the University of Pennsylvania and a former Bush Treasury official:

I believe we could have a financial crisis like we’ve seen in South America or Asia. It could easily happen, and under current policy will happen in the United States. People say, “Gee, give me a date.” Obviously, that’s impossible, but the longer we wait, the higher the probability. Could it happen in the next decade? Absolutely.

In 1802, President Thomas Jefferson said to Treasury Secretary Albert Gallatin:

We might hope to see the finances of the Union as clear and intelligible as a merchant’s books, so that every member of Congress and every man of any mind in the Union should be able to comprehend them, to investigate abuses, and consequently to control them.

Is it just me, or are we doing a lot of things these days the Founding Fathers warned against?

Source:

“Concern grows over a fiscal crisis for U.S.”
Carolyn Lochhead
San Francisco Chronicle, July 17, 2008

New Study: Housing Bust Causing Massive Losses In Household Wealth

Just wanted to share a press release with you from the think-tank of our old friend, Dean Baker:

Housing Market Meltdown Will Cause Massive Losses in Household Wealth

Plummeting house prices will leave millions of homeowners dependent almost exclusively on Social Security in their retirement

For Immediate Release: July 9, 2008
Contact: Alan Barber, (202) 293-5380 x 115

WASHINGTON, DC- As Senators McCain and Obama fine-tune their plans for Social Security in preparation for the 2008 presidential election, a new report from the Center for Economic and Policy Research (CEPR) shows that, due to the collapse of the housing bubble, the vast majority of Americans have accumulated little or no wealth. This means that they will be almost completely reliant on Social Security and Medicare to support them in their retirement years.

The study, “The Impact of the Housing Crash on Family Wealth,” analyzed the wealth holdings of families in all age cohorts in 2004 and projected the wealth of these families in 2009. The findings are presented by income quintile under three scenarios- real house prices remain at current levels, real house prices fall by an additional 10 percent, or real house prices fall by an additional 20 percent. In all three scenarios, the vast majority of these families will have little or no housing wealth in 2009.

“This extraordinary destruction of wealth will have tremendous implications for millions of families,” said report co-author Dean Baker. “Coupled with a very low personal savings rate, this means that many people, especially those near retirement will only have Social Security and Medicare to rely on once they leave the workforce.”

The report projects that if house prices stay the same through 2009, the median household headed by a person between the ages of 45 and 54, those in their prime earning years, will have 24.7 percent less wealth than did the median household in this age group in 2004. These households will have accumulated just $113,268 in net worth in 2009, barely $15,000 more than their counterparts in 1989, whose net worth totaled $97,600.

If real house prices fall 10 percent, the median household in the 45 to 54 cohort will see a 34.6 percent loss in wealth compared with the median in 2004 while families in the 18 to 34 cohort will lose of 67.6 percent. If prices fall by 20 percent, the most pessimistic scenario, families in the 55-64 cohort will experience a loss of 49.6 percent of their wealth compared to the same cohort in 2004.

This analysis should also prompt serious re-examination of policy proposals to cut Social Security and Medicare for near retirees. Baker commented, “policies that perhaps could have been justified at the peak of the housing bubble make much less sense now that tens of millions of near-retirees have just seen most of their wealth disappear.”

In analyzing wealth holdings for these families, the authors used data from the Federal Reserve Board’s 2004 Survey of Consumer Finance. The authors also used the S&P 500 and the Case-Shiller 20-City Composite Index to adjust for equity values and home price changes between 2004 and 2009.

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The Center for Economic and Policy Research is an independent, nonpartisan think tank that was established to promote democratic debate on the most important economic and social issues that affect people’s lives. CEPR’s Advisory Board of Economists includes Nobel Laureate economists Robert Solow and Joseph Stiglitz; Richard Freeman, Professor of Economics at Harvard University; and Eileen Appelbaum, Professor and Director of the Center for Women and Work at Rutgers University.

Source:

“Housing Market Meltdown Will Cause Massive Losses in Household Wealth”
Press Release
Center for Economic and Policy Research, July 9, 2008

Why Americans Should Worry

Let me tell it to you straight. The. Math. Politicians. Sell. Does. Not. Work. And if we don’t start dealing with the truth soon, this country could face dire consequences.

-David L. Walker, Comptroller General of the United States, October 2007

On February 15, David M. Walker, Comptroller General of the United States, announced his resignation as head of the U.S. Government Accountability Office (GAO). Since November 9, 1998, Walker has served as the nation’s chief accountability officer, leading the GAO in its mission to help improve the performance and accountability of the federal government for the benefit of the American people. Back on February 15, Richard Cowan wrote in Reuters that:

Walker repeatedly urged Congress to waste no time in reforming massive government programs, such as health care for the elderly, which will grow significantly as the U.S. population ages.

“The picture I will lay out for you… is not a pretty one and it’s getting worse with the passage of time,” the blunt-talking Walker told Congress more than once.

Despite those warnings, Congress and the White House have yet to begin cooperating on how to tackle the huge growth in health care and retirement benefit costs.

Back on December 18, 2007, I wrote:

On Monday, the Bush administration released its Financial Report of the United States Government for the 2007 budget year. And guess what? The U.S. government is promising $45 trillion more than it can deliver on Social Security, Medicare, and other benefit programs, according to the Associated Press yesterday…

Even worse, when the gap in funding social insurance programs (Social Security, Medicare, Railroad Retirement, and Black Lung Program) is added to other government commitments, the total shortfall as of September 30 increases to $53 trillion, up more than $2 trillion in just a year, according to the report. Comptroller General David M. Walker, who serves as the head of the Government Accountability Office (GAO), said Monday that, “Our government has made a whole lot of promises in the long-term that it cannot possibly keep.”

Yesterday, Bill Donoghue from MarketWatch had this to say about Walker’s departure:

Facing indifference on the Hill and unrealistic spending promises, Walker is resigning with five years still remaining in his term to head the newly formed Peter G. Peterson Foundation. Peterson, senior chairman of The Blackstone Group and Commerce secretary in the Nixon administration, has pledged an astounding startup budget for the foundation of $1 billion.

That money will attack what the foundation considers “the most substantial economic, fiscal and other sustainability challenges of our current age” — including federal entitlement programs, health care, unprecedented trade and budget deficits, low savings rates, mounting foreign debt, soaring energy consumption, an uncompetitive educational system, and the proliferation of nuclear warfare materials. Maybe Congress will listen this time.

The departing Comptroller General told Reuters:

As Comptroller General of the United States and head of the GAO, there are real limitations on what I can do and say in connection with key public policy issues, especially issues that directly relate to GAO’s client — the Congress.

My new position will provide me with the ability and resources to more aggressively address a range of current and emerging challenges facing our country.

MarketWatch’s Donoghue lamented:

This sounds to me like the ultimate sell signal on America…

When the nation’s best-informed watchdog resigns and few are acting on his recommendations on his “Fiscal Wake-Up Tour,” it’s time to reconsider over-optimistic domestic stock investments and look elsewhere, or bet against the U.S. market.

Source: stock.xchng

The “Fiscal Wake-Up Tour” is a joint public engagement initiative by the Concord Coalition, the Budgeting for National Priorities Project at the Brookings Institution, and the Heritage Foundation, created for the purpose of explaining in plain terms why budget analysts of diverse perspectives are increasingly alarmed by the nation’s long-term fiscal outlook.

(Note: The author disclaims any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)

Most Americans Face A Lower Standard Of Living In Retirement

I can’t say I’m too surprised about the following, especially when 62% of Americans expect to receive pensions, even though only 41% have them. Yesterday, CNN Money’s David Goldman talked about a report that was released Tuesday by the Center for Retirement Research (CRR) which said a majority of American workers will not be able to maintain their current standard of living after they retire. The center estimated 61% of households are “at risk” of being unable to live the way they would like and pay for their health care when they get old. CRR said consumers were at risk if the combined total of their savings, Social Security, and pension benefits was at least 10% short of the income needed in retirement to support the same standard of living they enjoyed while working. While previous reports assumed that less would be spent on consumer goods to cover health care costs, this study takes into account the idea that Americans want to keep on spending on the same amount of goods into retirement, while still being able to afford health care. Andrew D. Eschtruth, associate director for external relations at CRR, told CNN Money that:

People take the notion of health care for granted. The basic assumption of this report is that retirees think they will eat the same kind of foods, travel the same - or more - and buy the same clothes.

Goldman wrote:

If that’s the case, then there is cause for concern. Health care costs continue to increase dramatically, far outpacing wage increases year over year.

Additionally, out-of-pocket health care costs for most consumers rise significantly upon retirement. The report assumes that people recognize the burden of health care costs once they retire; however, those retirees to whom the added expense comes as a surprise will have to reduce their spending on consumer goods and spend much more on health care.

The CNN Money staff writer also noted that many workers do not have a realistic estimate of how much they will need to spend on health care when they retire, citing a 2007 study by the Employee Benefit Research Institute (EBRI). The EBRI report showed that 84% of employees estimated they and their spouse will need to accumulate less than $250,000 for retiree health costs, with 32% from this group thinking they would need less than $100,000. However, EBRI estimated that couples will need to save about $300,000 in retirement to cover health expenses, assuming they live to average life expectancy and Medicare benefits remain at current levels. For those who make it to age 95, this amount jumps to $550,000.

Wall Street’s Happy Holidays

“He’s making a list, checking it twice. Gonna find out who’s naughty and nice…”

I’m not referring to the jolly old fat man with the red suit and beard here. Instead, I’m talking about your boss and those in management, as they determine who will be receiving a year-end bonus. A long time ago (in a galaxy far, far away) bonuses were given out in recognition of an employee’s contribution to the organization. It used to be the greater the contribution, the larger the bonus (theoretically). Nowadays, as more managers are afraid to withhold bonuses from employees who may not deserve them in the first place, equal bonuses (usually as a percentage of salary) are given out across the board, thereby removing an essential financial incentive in the workplace. Bravo. Even worse, in some cases the “bonuses” that are distributed aren’t bonuses at all. Instead, they are really just cost of living adjustments. In stark contrast to the situations these poor souls are facing, it’s party time on Wall Street. Ironically, in a year when investment bank stocks plunged 45% in value, Wall Street bonus checks rose an average of 14% from last year, according to the Associated Press last Friday. Dean Baker, Co-Director of The Center for Economic and Policy Research (CEPR), noted in TruthOut on Christmas Eve that Morgan Stanley’s stock is down almost 20%, Lehman Brothers stock is down a bit more than 20%, and Citigroup’s stock price is down almost 50% from the beginning of the year. Baker said:

With a year like this, you might have expected that most of the Wall Street gang would be waking up on Christmas morning to find lumps of coal in their stockings. But, that’s not the way that the modern economy works… In a year in which tens of millions of families are struggling to pay their heating bills and hang onto to their homes, it seems that Santa still has a soft spot for the folks who cut deals on Wall Street.

Still, unless you’re a stockholder, it’s really none of your concern. However, Main Street might have a problem with the other reason why Wall Street is especially festive this holiday season. Baker explains:

Of course, it’s not just the shareholders who are generous with the Wall Street crew. All of us, as taxpayers, have done our part to ensure that these folks have a happy holiday season. In particular, we deserve thanks because we gave hedge and equity fund managers a special tax break that allows them to pay a much lower tax rate than workers like firefighters and schoolteachers. The fund managers’ tax break allows some of the richest people in the country to pay a tax rate of just 15 percent on their earnings, as compared to the 35 percent tax rate that they would face if they had to pay taxes like ordinary workers.

Congress did consider eliminating the fund managers’ tax break this year, but a determined lobbying effort saved the day. The fund managers told Congress that if they had to pay the same taxes as everyone else, their hundred million dollar salaries would not give them enough incentive to work. Undoubtedly some sizable campaign contributions made this argument more compelling to members of Congress.

One of the leaders of this lobbying effort was Peter Peterson, an investment banker with the Blackstone Group, a private equity firm that earned Peterson and other partners billions when it went public this year. Mr. Peterson is primarily known for having spent much of the last fifteen years arguing for cuts in Social Security and Medicare for people like schoolteachers and firefighters. When arguing for these cuts Mr. Peterson routinely asserts that he does not need his Social Security. With the tens of millions in tax breaks he gets from the government, this is surely true.

I sure hope Mr. Peterson has fire sprinklers in his home, because I have a feeling his local fire department may get “lost” should a fire ever break out…

Everyone smile and say “Medicare”

Bad Moon Rising

On Monday, the Bush administration released its Financial Report of the United States Government for the 2007 budget year. And guess what? The U.S. government is promising $45 trillion more than it can deliver on Social Security, Medicare, and other benefit programs, according to the Associated Press yesterday.

I see the bad moon arising.
I see trouble on the way.
I see earthquakes and lightnin.
I see bad times today.

The Bush administration said Monday that the $45 trillion represents the gap between the promises the U.S. government has made in benefits, and the projected revenue stream for these programs over the next 75 years. The shortfall increased by nearly $1 trillion in just one year when using the 2006 report as a benchmark. In addition, the gap between entitlements and revenue is up 67.8% in just the past four years. Martin Crutsinger, an AP Economics Writer, said that in 2003 the shortfall was projected to be only $26.9 trillion over the same 75-year time period.

I hear hurricanes ablowing.
I know the end is coming soon.
I fear rivers over flowing.
I hear the voice of rage and ruin.

Even worse, when the gap in funding social insurance programs (Social Security, Medicare, Railroad Retirement, and Black Lung Program) is added to other government commitments, the total shortfall as of September 30 increases to $53 trillion, up more than $2 trillion in just a year, according to the report. Comptroller General David M. Walker, who serves as the head of the Government Accountability Office (GAO), said Monday that, “Our government has made a whole lot of promises in the long-term that it cannot possibly keep.”

Hope you got your things together.
Hope you are quite prepared to die.
Looks like were in for nasty weather.
One eye is taken for an eye.

As usual, Congress said something should be done as 78 million Baby Boomers reach retirement age…

On a side note, the report said that the federal budget deficit would have been 69% higher than the $162.8 billion reported two months ago if the government were held to the same accounting standards as private companies. Using the accrual method of accounting, the deficit would have totaled $275.5 billion for the fiscal year ending September 30.