April 24, 2006

April 24, 2006 | Commentary on Federal Budget

Heading toward a deficit disaster: It's up to Congress to fix U.S. finances

Running a deficit is nothing new for Washington. But the problem's getting worse.

Last year, the "official" federal budget deficit was $319 billion, bringing D.C.'s total public debt to $4.6 trillion.

Those numbers boggle the mind. But they pale in comparison with what the federal government really owes.

Calculate all the outstanding federal obligations and liabilities - the benefits promised for Social Security, Medicare, federal pensions and retiree health care - and you'll find they total $46 trillion. That's four times larger than the entire U.S. economy.

It works out to $375,000 in unfunded federal liabilities for every full-time worker in America. It's as though each of us has taken out an extra mortgage, only without the fancy house!

You'd think that members of Congress would be taking serious steps to rein in spending and work out a plan to pay off these huge debts. They aren't.

Federal spending reached $22,000 per household last year. That level of spending represents fully one-fifth of the nation's economy (gross domestic product), but it's just the tip of the future spending iceberg.

The real concern is the future costs of promises made to baby boomers. When the boomers retire, spending on Social Security, Medicare and Medicaid will explode, doubling the total federal budget. Unless we change these programs, federal spending will gobble up nearly 50 percent of the economy by 2050.

The federal budget works on a pay-as-you-go-system based on when tax revenues come in and money that is paid out. When Congress estimates the cost of legislation, it looks only at expected short-term costs, using arbitrary five- and 10-year budget windows. There is no analysis of the long-term obligations or commitments.

This practice makes it easy to expand entitlements, since the bulk of the costs don't arise until well in the future. Conversely, it gives lawmakers no incentive to fix entitlements because solutions appear costly when not analyzed in terms of existing long-term commitments.

It's like a young couple with a no-limit credit card. Initially they can easily pay off their purchases over a few months. However, since their minimum payment is artificially low, they rationalize spending on items that are incompatible with their monthly income and budget. After months of making minimum payments and not getting ahead, they realize they have racked up considerable debt and can only pay it off by large sacrifices.

When Congress debated the new Medicare drug benefit, many considered the official $400 billion price tag (calculated for a 10-year budget window) to be reasonable. But they had no idea the benefit carried staggering long-term costs of $8 trillion. By contrast, during the Social Security reform debate, up-front transition costs made reform appear unaffordable because long-term savings that would occur later were never considered.

It's no way to do business. Indeed, Congress refuses to let business budget this way. Instead, it requires the private sector to disclose future obligations in their financial statements - including pensions and retiree health care - and to make annual payments to satisfy them.

At the mandate of Congress, the Financial Accounting Standards Board has set standards requiring private sector companies to record and report their obligations each year as they are incurred, even if they won't fall due until well into the future. If Congress played by the same rules, its budgets would have to disclose unfunded obligations and set aside a considerable amount of money each year to make good on its promises when payment falls due.

Just to finance Social Security and Medicare obligations for the next 75 years, Congress would have to pony up another $480 billion annually - nearly 20 percent of last year's total spending - and that's without interest.

Thus, the real federal deficit is hundreds of billions of dollars greater than the official figure. Congress and the nation can't afford to turn a blind eye to this calamity-in-the-making. Congress needs to adopt accounting practices similar to those imposed on the private sector. And Congress needs lawmakers with the courage to come up with a plan for government to live within its means.

Alison Acosta Fraser is director of the Roe Institute for Economic Policy Studies at The Heritage Foundation (heritage.org).

About the Author

Alison Acosta Fraser Senior Fellow and Director of Government Finance Programs
Domestic and Economic Policy

Related Issues: Federal Budget

First appeared in KansasCity.com