Even Baby Boomers Shouldn’t Bank on Social Security
Thomas LyonsA report from January of this year estimated the total US federal government’s 2007 debt to be $163 Billion, or about 1.16% of GDP. This is certainly not ideal, but with consistent economic growth the situation might prove at worst benign. Unless, of course, I told you that these figures aren’t based on accrual accounting.
For anyone who has studied accounting or regularly deals with financial statements, skip this paragraph. Government figures are based on cash, not accrual accounting. This means that expenses are recognized or accounted for (that is, appear on a financial statement) when the check to the debtee is written. Translation: any expenses that the government has accrued, yet not paid out – Social Security benefits, anyone? – are not accounted for in that number. Accrual accounting is a key rule for Generally Accepted Accounting Principles (GAAP), which form the standard rulebook for accounting everywhere. As expenses accrue, they are accounted for. The purpose, of course is transparency for the public; the avoidance of GAAP standard accounting was behind the “rise” of Enron.
In fact, using GAAP standard accounting to report accrued expenses forces the skeptical financial mind to conclude that accrued-yet-not-paid expenses must be included in Uncle Sam’s debt total. The government did not add $163 Billion to our debt-load last year; they added about $4 Trillion. The gross federal debt is not $13 Trillion; it’s $54 Trillion. Put another way, if the federal government were deemed an AAA rated borrower, and leveraged itself as a full percentage point worthier of a credit risk than standard Interbank funding, and sought to repay each debt is has promised over the next 30 years, and continued to pay zero interest on accrued social security benefits owed, monthly debt payments with interest would total $177,082,320,851.09. That’s $2.1 Trillion per year. That’s 15% of our GDP. That’s 67% of the current federal budget. If the government repaid only the interest on the debt floating at Wall Street Journal Prime minus 2%, $135 Billion would be owed monthly. (At present, “only” $400 Billion is spent annually on debt interest, due mostly to the fact that interest is not owed nor paid on Social Security entitlements, which form the bulk of Uncle Sam’s accrued debt.)
Getting serious about terming out the government’s debt load translates to every documented eligible worker devoting the entirety of his or her economic talent between January 1st and February 23rd each year to repaying public debt, every year until 2038. For some context, the often-cited price tag on the War in Iraq might reach $1 Trillion since 2003.
We’re left to conclude that the United States government is categorically bankrupt.
There are a number of implications to a bankrupt government. First, the dollar – backed by the “Full Faith and Credit” of the government – is or will be worthless. Any amount owed to anyone by the US government – including state & local governments, research institutions, federal employees, and US Bondholders – is worthless in the long-term. Federally insured debts – FDIC coverage for deposits, Fannie Mae and Freddie Mac held mortgages – become worthless investment vehicles. The dollar tanks. Interest rates skyrocket. Social security collapses. Medicare crumples. The Defense Department packs it up and goes home, leaving us open to foreign military threats.
I’ve alluded to the government’s issues with debt in the past. It seems that there are two options to be considered.
a.) Deem the government bankrupt, complete with all the implications attached thereto, or
b.) Write off accrued Social Security benefits (that is, welch on the owed funds).
If the government chooses to continue promising social security benefits, it will be bankrupt. If the government swallows the very difficult political pill of writing off the benefits, there still remains a chance that a functioning government might exist. Social security benefits are a luxury our government cannot afford to pay, and our people cannot afford to collect.
If reason is our only orthodoxy, then we must embrace the government writing off Social Security.
June 28th, 2008 at 4:59 am
Well, if we want a vision of where actually paying (or at least pay more of) our Social Security bill would look like, we need look no further than our neighbors to the north. Canadians personally finance pensions and health care generally more generous than the state-funded equivalents here, but it costs them at least half of every dollar they make to do so. One big reason they’re able to afford such luxuries (”luxuries” of course, meaning not that the programs are unimportant, but that they aren’t necessary to promote the proper functioning of society in the way that, say, the police or national defense are), of course, is that they don’t have much of a national defense budget. This is because they’re next to the US, which does have a very large national defense budget, and which would be forced out of strategic necessity to defend Canada were any nation inclined to attack it. So Canada trades national defense for social health and welfare programs, because it can, but even so, Canadians work from January 1st until at least June 30th to pay for them. The US doesn’t have Canada’s luxury, however — a key factor to consider in this debate. If we trade guns for butter we won’t have a big brother to the south to bail us out if things go wrong.