Thanks to a good accountant, the Burns family tax return was ready a week before deadline this year. Proud of ourselves, my wife and I signed it.
Then we contemplated its enormity. While far shorter than "War and Peace," the heft of our 40-page return was striking.
So was the amount we had paid.
If taxes are "the price we pay for civilization," our payment should help make America the Athens of the 21st century. I'm sure millions of others had very similar thoughts. Unfortunately, the price we pay for civilization will need to rise sharply in the near future. Whatever you paid this year, get ready to pay lots more.
The newest estimates come from two economists, Jagadeesh Gokhale and Kent Smetters at the Cato Institute and Wharton School, respectively. They are the economists whose estimates of unfunded government liabilities were summarily removed from the president's budget in 2003 as Treasury Secretary Paul O'Neill was ousted and replaced by John W. Snow.
Secretary Snow's immediate job was to sell the second round of tax cuts. The idea wouldn't have gone over very well if an official accounting of government liabilities had revealed the entire country was stone broke.
Writing in the March/April issue of the Financial Analysts Journal, Gokhale and Smetters update their earlier generational accounting work. Since 2003 things have gotten worse, not better. Their work shows:
- That our government has promised $63.675 trillion more in benefits than it will collect in taxes.
- That "if the federal government confiscated all the land in the United States along with all of its improvements buildings, highways, plants and equipment, and other durable assets built on it and sold them at auction to foreign investors, it would still fall more than $20 trillion short in present value of the monies required to satisfy its future budget."
- That the true federal deficit isn't the $200 billion-odd a year discussed in newspapers but nearly 10 times more, $2.4 trillion.
- That without Social Security and Medicare, we'd be running a surplus. The entire problem is the $72.9 trillion unfunded liabilities of Social Security and Medicare.
- That complete elimination of all military spending, forever, would only cover about one-half of the unfunded liabilities of Medicare.
- That paying for the promised benefits would require an immediate new 14.4 percent tax on all payroll. A tax increase that large probably wouldn't be collectible. Work would go underground.
- That the vast majority of the problem can be traced to a single program, Medicare. Its unfunded liabilities are 8.5 times as large as the unfunded liabilities of Social Security.
Lest you think Gokhale and Smetters belong to the Chicken Little School of Economics, the two economists compare their estimates with figures from the trustees for Social Security and Medicare. The trustees' estimates are $10.9 trillion
higher (see table).
| Broke, Busted, Tapped Out, Ruined, Strapped, and Cleaned Out |
| This table compares the present value in 2004 dollars of estimates for the unfunded liabilities of Social Security and Medicare. |
| Plan |
Gokhale/Smetters |
Trustees |
| Social Security |
7.7 trillion |
$13.4 trillion |
| Medicare Part A |
$23.7 |
$28.1 |
| Medicare Part B |
$26.0 |
$26.2 |
| Medicare Part D |
$15.6 |
$16.2 |
| Total |
$73.0 |
$83.9 |
To put these figures in perspective, the total output of the U.S. economy is now about $12.5 trillion. The Federal Reserve recently estimated the net worth of all U.S. consumers -- that's you, me and Bill Gates -- at $55.6 trillion.
The two economists ask why the credit markets aren't treating the U.S. Treasury like a poor cousin to General Motors. They suggest four possible answers, but I've got one of my own: Every government in the world does exactly the same thing.
ON THE WEB
The $96.27 billion federal deficit -- for March
May 16, 2006: When Worlds Collide
May 14, 2006: This Year, a $3 Trillion Lump Under the Rug
June 1, 2003: The $43 Trillion Surprise
Dec. 3, 2002: Why We Can't Help Our Children Enough
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Personal finance writer Scott Burns is syndicated by Universal Press. His twice weekly column appears in newspapers from Boston to Seattle. He is the Chief Investment Strategist for AssetBuilder, Inc. Readers can register at www.scottburns.com. Questions/comments can be posted directly. They can also be sent, without registration, to scott@scottburns.com. Questions of general interest will be answered in future columns and on this blog.
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