Increasing Taxes on the Rich and the Fiscal Cliff Discussions Are Just a Sideshow ... The Really Hard Choices Lie Ahead

We have $16 trillion in officially acknowledged national debt but in reality it's closing in on $100 trillion in total liabilities.

We have $1 trillion in acknowledged deficits but in reality we're incurring another several trillion dollars in annual operating deficits on top of that -- or total annual deficits exceeding $5 trillion.

The difference amounts to what we actually spend and have borrowed and what we would spend and borrow if we decided to properly fund the entitlement promises we've made to ourselves and future generations.

In this regard, Social Security and Medicare promises are the biggies. While we all want to believe they're earned benefits, in reality they're mostly welfare programs.

Simply said, these benefits can't properly be referred to as earned if the money hasn't been set aside to pay for them when the payments later come due. And it hasn't.

Government officials, often with the silent acquiescence of We the People, have in essence lied to us for a long time now about the nation's true fiscal condition. It's dramatically worse than we've been told and very much want to believe.

And now they're lying about what a combination of raising taxes on the rich and just a little tweaking on entitlements can accomplish. So let's set the record straight.

Why $16 trillion Only Hints at the U.S. Debt is subtitled 'Hiding the government's liabilities from the public makes it seem that we can tax our way out of mounting deficits. We can't.'

Here's what the editorial says:

"In 1994 we predicted that, unless something was done to control runaway entitlement spending, Medicare and Social Security would eventually go bankrupt or confront severe benefit cuts.

Eighteen years later, nothing has been done. Why? The usual reason is that entitlement reform is the third rail of American politics. That explanation presupposes voter demand for entitlements at any cost, even if it means bankrupting the nation.

A better explanation is that the full extent of the problem has remained hidden from policy makers and the public because of less than transparent government financial statements. How else could responsible officials claim that Medicare and Social Security have the resources they need to fulfill their commitments for years to come?

As Washington wrestles with the roughly $600 billion "fiscal cliff" and the 2013 budget, the far greater fiscal challenge of the U.S. government's unfunded pension and health-care liabilities remains offstage. . . .

The U.S. Treasury "balance sheet" does list liabilities such as Treasury debt issued to the public, federal employee pensions, and post-retirement health benefits. But it does not include the unfunded liabilities of Medicare, Social Security and other outsized and very real obligations.

As a result, fiscal policy discussions generally focus on current-year budget deficits, the accumulated national debt, and the relationships between these two items and gross domestic product. We most often hear about the alarming $15.96 trillion national debt (more than 100% of GDP), and the 2012 budget deficit of $1.1 trillion (6.97% of GDP). As dangerous as those numbers are, they do not begin to tell the story of the federal government's true liabilities.

The actual liabilities of the federal government—including Social Security, Medicare, and federal employees' future retirement benefits—already exceed $86.8 trillion, or 550% of GDP. For the year ending Dec. 31, 2011, the annual accrued expense of Medicare and Social Security was $7 trillion. Nothing like that figure is used in calculating the deficit. In reality, the reported budget deficit is less than one-fifth of the more accurate figure.

Why haven't Americans heard about the titanic $86.8 trillion liability from these programs?... As of the most recent Trustees' report in April, the net present value of the unfunded liability of Medicare was $42.8 trillion. The comparable balance sheet liability for Social Security is $20.5 trillion.

Were American policy makers to have the benefit of transparent financial statements prepared the way public companies must report their pension liabilities, they would see clearly the magnitude of the future borrowing that these liabilities imply. Borrowing on this scale could eclipse the capacity of global capital markets—and bankrupt not only the programs themselves but the entire federal government.

These real-world impacts will be felt when currently unfunded liabilities need to be paid. In theory, the Medicare and Social Security trust funds have at least some money to pay a portion of the bills that are coming due. In actuality, the cupboard is bare: 100% of the payroll taxes for these programs were spent in the same year they were collected. . . .

When the accrued expenses of the government's entitlement programs are counted, it becomes clear that to collect enough tax revenue just to avoid going deeper into debt would require over $8 trillion in tax collections annually. That is the total of the average annual accrued liabilities of just the two largest entitlement programs, plus the annual cash deficit.

Nothing like that $8 trillion amount is available for the IRS to target. According to the most recent tax data, all individuals filing tax returns in America and earning more than $66,193 per year have a total adjusted gross income of $5.1 trillion. In 2006, when corporate taxable income peaked before the recession, all corporations in the U.S. had total income for tax purposes of $1.6 trillion. That comes to $6.7 trillion available to tax from these individuals and corporations under existing tax laws.

In short, if the government confiscated the entire adjusted gross income of these American taxpayers, plus all of the corporate taxable income in the year before the recession, it wouldn't be nearly enough to fund the over $8 trillion per year in the growth of U.S. liabilities. Some public officials and pundits claim we can dig our way out through tax increases on upper-income earners, or even all taxpayers. In reality, that would amount to bailing out the Pacific Ocean with a teaspoon. Only by addressing these unsustainable spending commitments can the nation's debt and deficit problems be solved."

Summing Up

The above ain't pretty, but it does tell the truth.

So to my fellow Americans, I say this. For now, enjoy the fiscal cliff theater and tax the rich distorted discussions currently underway in Washington.

And if you want, feel free to enjoy as well the B.S. but sincerely sounding comments about "saving the middle class" and "protecting" Medicare and Social Security.

Because after the circus is over, the real work lies ahead.

And that will necessitate We the People choosing between (1) a collectivist based welfare society and (2) an individualist based opportunity society for America's future.

We can't keep promising freebies in the future without paying for them as we go.

As the editorial puts it, our entitlements cupboard is already bare.

Thanks. Bob.