Neither Kerry nor Bush is talking about it, and no one seems to give a darn.
But with just 64 days before the election, Americans continue to be duped – by both parties – in the greatest federal budget hoax of all time.
The two main offices of the federal government responsible for tracking the budget are the Office of Management and Budget (OMB) and the Congressional Budget Office (CBO).
But both have consistently underestimated the potential budget shortfalls over the next ten years.
Just look at this progression, and you will see what I mean …
* In February of 2001, the OMB estimated that we would have a huge windfall of surpluses adding up to a whopping $5.6 trillion by the end of 2008.
* Just three years later, in February of 2004, the OMB’s estimate had changed. Instead of a huge surplus, it was now forecasting a huge deficit of $1.4 trillion.
* Now, the OMB has upped the forecast to a $1.9 trillion deficit.
But this is still a gross understatement. According to the Concord Coalition, a bipartisan coalition of political and business leaders concerned about the budget deficit, even assuming strong economic growth, plausible projections for the 10-year outlook show deficits of about $5 trillion!
* And according to the American Enterprise Institute, the federal imbalance could grow to $9.7 trillion between now and 2008 – more than five times the OMB’s current projections.
Finding it hard to believe that the OMB could be that far off? If so, then take another look at the table below …
Huge, Unforgivable, Partially Deliberate Errors In Government Deficit Forecasts (Accumulated Deficit Through 2008)
| OMB forecast made in 2001 | $5.6 trillion surplus |
| Latest OMB forecast | $1.9 trillion deficit |
| OMB’s past forecast error | $7.5 trillion |
| Latest OMB forecast | $1.9 trillion deficit |
| Independent economic forecasts | $9.7 trillion deficit |
| OMB’s possible future forecast error | $7.8 trillion |
The chart above tells it all: Right now, the gap between what the OMB is forecasting and what respected independent economists deem more likely is $7.8 trillion. This may sound like an unbelievably large range of error. But if you look at OMB’s 2001 forecast and compare it to today’s, you’ll see they have already made a $7.5 trillion blunder! So it’s perfectly reasonable to assume they could make a similar mistake again.
Denial
Meanwhile, both sides of the aisle are in fierce denial, with both Republicans and Democracts still insisting that the deficit is ‘manageable and reasonable.”
Their reasoning: It represents ‘only’ 4.3% of the size of the economy (GDP). But there are a whole series of fallacies in that argument …
Fallacy #1. The 4.3% of GDP is based on official budget estimates. If you add in the amount the government is borrowing every quarter from the Social Security Trust Fund plus the government’s tacit commitments to government-related agencies, the deficit is actually closer to 7% or even 8% of GDP.
Fallacy #2. The entire economy has itself been temporarily bloated by a series of one-time shots in the arm – 13 interest-rate cuts … hundreds of billions in tax cuts … $400 tax rebate checks sent to 25 million Americans … and more. But now the effect of these money injections is waning, and the economic recovery is faltering.
This means the GDP will be smaller than expected and the deficit will be larger. Result: The official deficit itself could zoom to 7%, 8%, even 9% of GDP, by far the highest in modern times.
Fallacy #3. The last time we had huge deficits – under President Reagan – local and state governments were in relatively better shape. No more! Today, if you consider the deficits of all governments (including local and federal), the situation is actually worse than during the Reagan era.
Fallacy #4. Even if you accept the government’s numbers at face value, the current round of deficits still represents the second worst in the past century. That’s not exactly something to brag about.
The Concord Coalition puts it this way: To say that current deficit levels are manageable and reasonable is ‘an open invitation to higher deficits. Policy-makers need to stop the hemorrhage of red ink, face up to the necessary trade-offs and negotiate a new balanced budget plan. Without restoring such a firm goal, fiscal policy will continue its downward spiral.’
I agree, and the further we look out into the future, the worse it gets.
Indeed, many economists are now warning of a fiscal train wreck as the government piles up trillions of dollars in obligations to pay Social Security and Medicare expenses for generations of baby boomers now approaching retirement.
* The American Enterprise Institute says the current imbalance for the two massive entitlement programs is now a shocking $43 trillion!
* The Brookings Institution says that’s too low. Their estimate of the gap is $59 trillion!
* Even assuming the smaller figure, it means that even if the government could somehow cut all discretionary spending to zero foreover … even if it had to make payments strictly for Social Security, Medicare, and interest … we would still have big deficits stretching out as far as the eye can see.
* Put another way: The government would have to raise federal income taxes by 70% – permanently – to close the gap.
The Greatest Government
Liabilities in the History of The World
Never before has any government made such huge commitments without the present or future wherewithal to fulfill them! And never before has there been so much complacency about such a huge looming crisis!
That’s why Alan Greenspan was so much more forceful in his warnings about Social Security and Medicare last week.
And that’s why the Concord Coalition decided to dedicate its most recent press release to this looming disaster …
“For the first time ever in 2004, the annual reports of the Social Security and Medicare Trustees contained a complete accounting of the programs’ unfunded benefit liabilities.
“In addition to the usual calculations of Social Security’s and Medicare’s ‘actuarial deficit’ ($4.0 trillion and $8.5 trillion, respectively), the reports included measures of the programs’ ‘closed group’ liabilities ($12.7 trillion and $29.5 trillion) and ‘infinite horizon’ liabilities ($11.9 trillion and $61.7 trillion). The OMB and Treasury have also published similar liability estimates.
“The new focus on unfunded liabilities is welcome. The Concord Coalition has long stressed the crucial importance of honest accounting for the government’s entitlement commitments. Unfortunately, there is considerable confusion about what the numbers mean.
“Many policymakers assume that the ‘official’ (and smaller) actuarial deficit figures must be more important than the alternative (and larger) liability estimates, whereas just the opposite is true. Few understand that all of the liability measures are present value figures, and that as such even the largest numbers may understate the long-term challenge.
“The federal government’s unfunded benefit liabilities are increasingly reported in the press and discussed in Congress. There is even a bill, sponsored by Senator Lieberman, that would make monitoring one special measure-the government’s overall ‘fiscal imbalance’-a formal part of the budget process. It’s time to review what the different measures mean, why they are important, and what their limitations are.
A Vast Sum
“Let’s start with the basics: Unfunded benefit liabilities summarize the gap between projected program revenues and projected expenditures in a single ‘present value’ number. In other words, they tell us the amount of extra money that we would have to have on hand and set aside today in an interest-earning account in order to precisely cover future costs.
“Until recently, the only widely reported liability measure was ‘actuarial balance,’ the official indicator of Social Security’s and Medicare’s trust-fund solvency. The Trustees define actuarial balance as the present value of trust-fund revenue over the next seventy-five years plus current trust-fund assets minus the present value of trust-fund expenditures over the same period. As of the beginning of 2004, Social Security’s actuarial balance was a deficit of $4.0 trillion-or the equivalent of an extra 1.9 percent of U.S. worker payroll each year starting today.
“Defenders of the entitlements status quo like to cite Social Security’s actuarial deficit because it makes the long-term problem seem modest. Yes, the defenders say, an extra two percent of payroll may be a significant levy, but surely we cannot regard it as a catastrophic imposition on future workers.
“Actuarial balance, however, is a highly misleading measure of the long-term cost challenge. To begin with, it counts trust-fund assets as genuine savings, even though these assets aren’t going to reduce future tax liabilities by one dime. The CBO, GAO, and OMB all concur: The trust funds represent a claim on future tax revenues, not real savings that can be drawn down to defray future benefit costs. If we exclude trust-fund assets from the calculation, Social Security’s unfunded liability leaps to $5.5 trillion.
“There’s another problem with actuarial balance: the arbitrary seventy-five-year time horizon. This limit assumes that future Americans will allow Social Security to run off a financial cliff in 2079. In other words, it assumes that our children, come the year 2025 or 2050, will be utterly unconcerned with the fate of their own children. To assess Social Security’s true financial status, we need to look at its liabilities over a longer-indeed infinite-time horizon.
“While this may strike some readers as unusual, it is actually the seventy-five-year cut-off that is odd. Private financial markets routinely value income and expenditure in perpetuity. Perhaps taking a cue, the Trustees now calculate and publish an ‘infinite horizon’ liability estimate for Social Security. It is $11.9 trillion excluding trust-fund assets-or three times Social Security’s official actuarial deficit.
“Social Security of course isn’t the only program for which the government is accumulating long-term liabilities. There is also Medicare.
“According to the Trustees, Medicare has an actuarial deficit of $8.5 trillion. This measure, however, is even more misleading in the case of Medicare than of Social Security. Not only does it count illusory trust-fund assets, it ignores trillions of dollars in very real Medicare spending, including the new prescription drug benefit, because it is paid for outside the Hospital Insurance program, the trust-fund financed portion of Medicare.
“If we include all Medicare spending-and extend the calculation over an infinite time horizon-Medicare’s true liability turns out to be $62 trillion, or seven times its official actuarial deficit. The combined liability for the two major senior entitlements thus comes to $74 trillion ….
“Whichever measure you pick, we are talking about a vast sum. The $42 trillion closed group liability for Social Security and Medicare is ten times greater than our publicly held national debt ($4 trillion). The $74 trillion infinite future liability exceeds our nation’s total net worth ($42 trillion, which includes all property owned by U.S. residents-real and financial). Paying it off would require taxing away an extra 18 percent of workers’ earnings forever-again, starting today …”
Direst Warnings
For many years, my father and I have issued similar warnings, but none have been this dire.
We warned that our excesses of today will doom future generations to a lower standard of living.
Now, the future is here – and WE are the future generation.
My advice: Protect your wealth from the unwelcome damage this crisis will inevitably bring to nearly every investment portfolio on the planet.
Good luck and God bless!
Martin
Martin D. Weiss, Ph.D.
Editor, Safe Money Report
Chairman, Weiss Ratings, Inc.
