By Bryan R. Lawrence
Releasing information
on the Friday before a big holiday is a time-tested way to bury bad news. So
when the Government Accountability Office’s fiscal 2011 financial statements
for the federal government were released on the Friday before Christmas, it
made sense to read them closely.
Since 1997, the
United States has been a rare example of a government willing to publish
financial statements using accrual accounting, which counts the cost of
promises made as well as cash paid out. And the GAO’s professionalism over the
years has won it a reputation for impartiality and effectiveness.
That professionalism
is evident in the GAO analysis of the net present value of the Social Security
and Medicare promises Washington has made to Americans. “Net present value”
means the total that would have to be set aside today to pay the costs of these
programs in the future. The government puts these numbers in appendices, rather
than in headlines. But the costs are real.
In fiscal 2011, the
cost of the promises grew from $30.9 trillion to $33.8 trillion. To put that in
context, consider that the total value of companies traded on U.S. stock
markets is $13.1 trillion, based on the Wilshire 5000 index, and the value of
the equity in U.S. taxpayers’ homes, according to Freddie Mac, is $6.2
trillion. Said another way, there is not enough wealth in America to meet those
promises.
If the government
followed corporate accounting rules, that $2.9 trillion increase would be added
to the $1.3 trillion cash deficit for fiscal 2011 that has been widely
reported. And a $4.2 trillion deficit is something that Americans need to know
about.
The Treasury
acknowledges the need to show an accrual-based deficit, but the only retirement
accruals it includes in its “Citizen’s Guide” to the GAO numbers are for
promises to direct government employees and veterans. Promises to the rest of
Americans are excluded, even though they are multiples larger than the $10.2
trillion of government debt held by the public.
The latest GAO
numbers are particularly interesting because of a change in accounting
standards that requires the government to explain why the cost grew by $2.9
trillion. Fully $1.5 trillion of that reflects the aging of all 312 million
Americans by one year. In the GAO report from fiscal 2001, the cost of promises
was $17 trillion. The growth in the cost from $17 trillion to $33.8 trillion
averages about $1.7 trillion per year. The GAO doesn’t specify numbers for the
other nine years, but one suspects that aging has driven most of the growth in
the cost of the promises.
The cost would have
been a lot worse but for two assumptions that the GAO found questionable.
First, Medicare’s
cost projections assume legally required decreases in reimbursement rates to
doctors that Congress has ignored for years — the so-called doc fix. For these
projections to be realized, Congress would have to abide by its own cost
controls and allow an immediate 27 percent cut to doctors’ rates, which is very
unlikely.
Second, the Medicare
projections assume that the 2010 Affordable Care Act (ACA) will reduce
health-care cost growth by 1.1 percent per year, despite doubts voiced by the
GAO and a panel appointed by the Medicare board of trustees.
The panel and the GAO
recommended including an alternate scenario in the year-end figures, in which
the doc fix continues and the ACA cost reductions do not materialize. The
result is a $12.4 trillion increase in the cost of the promises, to more than
$46 trillion. Given Congress’s history with the doc fix, and the general
paralysis in Washington, it’s hard to argue with the GAO’s lack of confidence
in Congress’s ability to honor its own cost controls.
If the government
were a company, its huge and growing off-balance-sheet liabilities would set
off alarm bells. But investor confidence has not been lost — Treasurys can
still be sold at very attractive yields.
Confidence has been
shaken, though, among the American people. Congress’s approval ratings are at
record lows. Anger is flaring across the political spectrum, reflecting a sense
that something has broken in our country.
In such an
environment, is it right to release critical financial information the Friday
before Christmas? Is it acceptable that politicians are not required to
describe the cost of the promises they have made?
In 1990, the
government required that companies begin to account for the net present value
of retirement promises, not just current-year cash flows. General Motors began
complying in 1992; and it recorded a $33.1 billion (pretax) charge to reflect
the value of its promises up to that point, which led to what was then the
largest annual loss in U.S. corporate history. Seventeen years later, the “free
until accounted for” promises were a major factor in GM’s bankruptcy.
The United States is
stronger than General Motors. And the good news is that small changes in
health-care cost trends have a large impact on the government’s long-term
promises. Our system is fixable. But our politics are toxic, and each side is
dug into an ideological trench. In such an environment, when hard choices need
to be made about promises and taxes, why should information be buried in an
appendix?
Americans deserve
better. One way for Washington to start earning back our trust is by giving us
all the information, even if it is unpleasant.
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