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DebtFreeGuru.com's - Tip of the Week - Monday, June 9, 2003

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(Please read my commentary at the end of this article!)

The Government's $43 Trillion Secret

Long before the latest tax cut, the government got word that its long-term obligations are 10 times the amount previously thought -- and promptly buried the study. - By Scott Burns (As seen on MSN.Com)

On Friday, May 16, the word was out. A $350 billion tax cut was a done deal.

So why did the stock market sink that day? Why did it plunge the following Monday, losing 2.5% of its value?

One possible explanation is Treasury Secretary John Snow and his comments on the dollar. Another is concern about new terrorist attacks. But let me suggest a third possibility: In spite of efforts to suppress it, word is getting around we can't afford a tax cut.

The story starts one night in January, only days after Treasury Secretary Snow had replaced Paul O'Neill.

Two men were leaving a restaurant in Santa Fe, N.M. A cell phone rang. The caller told Boston University economist Laurence J. Kotlikoff that six months of work by two economists was going to be deleted from the president's budget. The budget was due to be published in February. I know this happened, because I was the second man: Professor Kotlikoff was in Santa Fe working on a book project with me.

The material to be deleted from the budget document was an updating of generational accounting. Former Treasury Secretary O'Neill had requested an estimate of the true, long-term obligations of the U.S. government.

The estimate would include the formal debt of the U.S. Treasury plus equally serious government promises to provide retirement income and medical care. (Readers who think promises of Social Security and Medicare aren't as serious as U.S. Treasury bond promises should visit the nearest elderly person.)

The resulting information might easily have been lost in a document whose online girth is measured in megabytes.

Except for one thing.

The new accounting shows the United States is broke.

Buried, But Not Forgotten
The study shows the true obligations of government were 10 times larger than Treasury debt held by the public. It shows the present value of these unfunded obligations is a mind-numbing $43 trillion.

In a recent telephone conversation I asked one of the project economists, Jagadeesh Gokhale, why he thought his work was cut. Dr. Gokhale, a senior economist for the Federal Reserve Bank of Cleveland, was circumspect. He suggested the figures were a surprise to the new Treasury secretary.

Here's another interpretation: Treasury Secretary Snow's first task was to sell the president's tax cut. The sales job would be awkward if an official government document announced we were already $43 trillion in the hole. (The Federal Reserve, by the way, recently put the net worth of all households at $39 trillion. This problem goes way beyond taxing the rich, the poor or the middle class.)

So the generational accounting figures disappeared from the budget.

But they did not cease to exist. In early March the other economist on the project, Kent Smetters, testified before the Subcommittee on the Constitution of the United States in the House of Representatives. Professor Smetters, an expert in Social Security and Medicare, is at the Wharton School in Philadelphia.

Asked to comment on the Balanced Budget Amendment, H.J. Res. 22, Smetters was direct: "I support practically any effort to make it harder for one generation to pass large fiscal burdens to future generations ..."

Unfortunately, he noted, government cash accounting is a poor basis for a Balanced Budget Amendment. "The government reports that the national debt in 2003 was about $3.8 trillion in the form of government 'debt held by the public.' But that number ignores massive imbalances in Medicare and Social Security programs and the government's other programs.

"When the liabilities associated with those programs are taken into account, the nation's fiscal policy is currently off-balance by over $43.4 trillion in present value, a number that is not reported in standard budget documents," he told the committee (italics added).

Next Generation On Hook For $1.7 Trillion
The American Enterprise Institute will soon publish a pamphlet, co-authored by Jagadeesh Gokhale and Kent Smetters. The draft copy, which I've read, does more than lay out the size of the unfunded liabilities of government. It shows how much the current generation is benefiting at the expense of the next.

It shows, for instance, that past and current generations of Social Security recipients will receive $8.7 trillion more in benefits than they will pay in employment taxes. Our children and grandchildren will pay $1.7 trillion more in employment taxes than they will receive in benefits.

I asked Dr. Gokhale if the figures in the AEI document, Smetters' testimony, and what was supposed to appear in the president's budget were identical. He said there had been some changes in assumptions. But they were very similar.

Republicans and Democrats have distracted us with unending battles between haves and have-nots for decades. Over the same period they have bankrupted the country.

Perhaps that terror, not the terrorism of al-Qaida or currency traders, may explain the odd market decline after a tax cut that was supposed to make stocks soar.

Commentary by John Moore

I don’t normally add commentary to articles I feel would be of interest to you. However, this particular information requires that I add a few of my own thoughts.

We have become a nation of people with our hands out asking the government to take care of us. Not just those that are unable to take care of themselves, but everyone who failed to plan appropriately for that day where they will be unable to work any longer.

It started innocently enough with wanting take care of people in their “old age” through what was promoted as “old age insurance”. This was after the supporters of it went all the way to the Supreme Court to prove it was “not insurance” as to avoid insurance laws and not have to meet the required set aside capital to provide for those future liabilities.

But now with increasingly larger jumps in our longevity and the cost to get us to those “later years” increasing due to advances in medicine, these un-funded liabilities are, have and will bankrupt America.

And those un-funded liabilities sometime increase without us even being aware of it.

For example, there is a bill pending that will provide prescription coverage for Medicare participants that is expected to cost 400 billion dollars over 10 years. This is based on current dollar values and current projections for reimbursement based on what drugs people are taking today. And pays for 100% of all prescriptions after the recipient has $3,700 out of pocket..

But does take into account such illnesses like diabetes with 16 million Americans affected and an annual cost of $92 Billion a YEAR or just under $6,000 per person. Diabetes is growing at epidemic proportions with no signs of slowing down as a result of our poor eating habits and growing waistlines.

And just last month, the pharmaceutical industry successfully double the amount of medication you need to take if your have hypertension or pre-hypertension by lower what was is considered “normal” blood pressure and recommending two drugs instead of one. So now all those with what were considered hypertension and pre-hypertension have to take more drugs. And those that were considered normal now need medication!

I don’t mean to pick on healthcare, but this is one area that has tremendous un-funded liabilities. This is a good example of a system out of control and where everyone has a sense of entitlement, which was originally caused by the creation of medical insurance.

More importantly this study and article reinforces the need for you and I to be “fiscally” responsible. It’s not about blame or politics, partisan or not.

It’s about making sure that you and I have planned to have as many resources as possible that you control directly, as opposed to government or corporate control. It’s about having your home paid free and clear. It’s about you having personal and financial freedom regardless of what is going on in the economy, jobs or stock market.

If you owe more than your assets are worth you’re considered insolvent.

With America having $43 Trillion in obligations and only $39 Trillion in American “net worth” (not assets, but net worth, that is the value of your assets after you have deducted your outstanding liabilities), America is insolvent.

What can you do about it? First, the government is only a reflection of its people.

How many of us are willing to do something today and allow “someone else” now or in the future, to be financially responsible for it? It sounds something like “let’s go ahead and we’ll worry about how we’ll pay for it later.”

Each and every one of us has to become a “Fiscal Responsible” and begin to communicate that to our children, family, friends and especially our legislators.

Please forward this to everyone you know or have in your address book.

Thank you for giving me your time, energy and focus! – Love & Light - John

DebtFreeGuru.com - Tip of the Week - Monday, June 9, 2003

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