Monday, November 26, 2007

To Fund War, Govt Hides Trillions of Dollars in Debt $$$

Every year, tens or even hundreds of billions of dollars are quietly added to the U.S. national debt -- on top of the deficits that we hear about. What's going on?
By Scott Burns
November 21, 2007

When it comes to financial magic, the government of the United States takes the prize. Sleights of hand and clever distractions by purveyors of line-of-credit mortgages, living-benefit variable annuities and equity-indexed life insurance are clumsy parlour tricks compared with the Big Magic of American politicians.

Consider the proud trumpeting that came from Washington at the close of fiscal 2007. The deficit for the unified budget was, politicians crowed, down to a mere $162.8 billion.

In fact, the U.S. government is overspending at a far greater rate. The total federal debt actually increased by $497.1 billion over the same period.

But politicians of both parties use happy numbers to distract American voters. Democrats routinely criticize the Republican administration for crippling deficits, but they politely use the least-damaging figure, the $162.8 billion. Why? Because references to more-realistic accounting would reveal vastly greater numbers and implicate both parties.

You can understand how this is done by taking a close look at a single statement on U.S. federal finance from the president's Council of Economic Advisers. The September statement shows that the "on-budget" numbers produced a deficit of $344.3 billion in fiscal 2007. The "off-budget" numbers had a surplus of $181.5 billion. (The off-budget figures are dominated by Social Security, Medicare and other programs with trust funds.)

Combine those two figures and you get the unified budget, that $162.8 billion. In the past eight years there's been two years of reported surpluses and six years of reported deficits. Altogether, the total reported deficit has run $1.3 trillion.

Some numbers don't add up..
But if you examine another figure, the gross U.S. federal debt, you'll see something strange. First, the U.S. debt has increased in each of the past eight years, even in the two years when surpluses were reported. Second, the gross federal debt, which includes the obligations held by the Social Security and Medicare trust funds, has increased much faster than the deficits -- about $3.3 trillion over the same eight years.

That's $2 trillion more than the reported $1.3 trillion in deficits over the period. Can you spell "Enron"?

In other words, while the reported deficits averaged $164 billion over the past eight years, U.S. government debt increased an average of $418 billion a year. That's a lot more than twice as much.

How could this happen?

Easy. The U.S. Treasury Department simply credits the Social Security, Medicare and other trust funds with interest payments in the form of new Treasury obligations. No cash is actually paid. The trust funds magically increase in value with a bookkeeping entry. It represents money the American government owes itself.

So what happens when the funny money is taken away?

When the imaginary interest payments are included, Social Security and Medicare are running at a tranquilizing surplus (that $181.5 billion mentioned earlier). But measure actual cash, and the surplus disappears.

In 2005, for instance, the U.S. Social Security Disability Income program started to run at a cash loss. 2007 is the first year that Medicare Part A (the hospital insurance program) benefits exceeded income.

The same thing will happen to the U.S. Social Security retirement-income program in six to nine years, depending on which of the trustees' estimates you use. During the same period, the expenses of Medicare Part B and Part D, which are paid out of general tax revenue, will rise rapidly.

Despite this, the U.S. Social Security Administration writes workers every year advising them that the program will have a problem 34 years from now, not six or nine years. In fact, the real problem is already here. It will be a big-time problem in less than a decade.

Count on it.

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