No matter how you slice it the United States’ $15.5 trillion national debt is huge.
To give you a sense of just how big, consider that with that amount of money you could pay four-year’s worth of college tuition for about 470 million people – roughly 1.5 times the current population of the US.
Sadly, that $15.5 trillion doesn’t even come close to approaching the true size of our debt. The reason is that the Treasury Department currently ignores one of the biggest looming costs for the federal government – the unfunded liabilities of Medicare and Social Security.
The reason is that the Treasury calculates the deficit based on “cash accounting” in which revenues are recorded when they are received and expenses are counted when they are actually paid. But this type of accounting completely ignores the very real costs that the federal government will be forced to pay as older generations begin to reach retirement age.
A more realistic accounting principal is called accrual accounting. According to the website Investopedia accrual accounting, “measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur. . . This method allows the current cash inflows/outflows to be combined with future expected cash inflows/outflows to give a more accurate picture of a company’s current financial condition.”
The accrual method is the one that most private sector businesses are required to use in order to account for the impact pension costs are having on their bottom line. A recent Washington Post editorial explained the impact the change from cash to accrual had on some companies when the switch was made in 1992.
“General Motors made its first retirement promises to workers in 1950. Under the accounting rules of the time, GM did not have to recognize the current cost of these future promises, as they were considered immaterial to the company’s operations.
Forty-two years later, American’s longer life spans and increasingly expensive health care had dramatically increased the cost. The Financial Accounting Standards board, a private organization given responsibility by the U.S. government for setting private-sector accounting rules, decided that corporate retirement promises had become material, and it required GM and other companies to begin recognizing their current cost.
The $33 billion charge GM recorded in 1992 was equal to 29 percent of the company’s revenue. . . Seventeen years later, these retirement promises were a major factor in GM filing for bankruptcy.”
How sadly ironic that the federal government requires the private sector to account for future health costs, but completely ignores them in their own accounting of the national debt.
Fortunately, the Government Accountability Office (GAO) produces a report each year showing the true debt using accrual accounting. The results are eye-popping.
“In fiscal 2011, the cost of the promises grew from $30.9 trillion to $33.8 trillion,” writes Bryan Lawrence in the Washington Post. “To put that in context, consider that the total value of companies traded on US stock markets is $13.1 trillion, based on the Wilshire 5000 index, and the value of the equity in US taxpayer’ homes, according to Freddie Mac, is $6.2 trillion. Said another way, there is not enough wealth in American to meet those promises.”
Even that $33.8 trillion figure is based on some unrealistic assumptions. That’s why the GAO also released an “alternative scenario” in which the doc fix is continued and Obamacare savings don’t materialize. Using those assumptions the cost of the unfunded liabilities jumps to more than $46 trillion.
Using this more honest accounting system last year’s $1.3 trillion deficit balloons to $4.2 trillion and the whispers of reform would turn to shouts of rage. Of course, Obama doesn’t want to own up to the enormity of the problem. That’s why he released the GAO report uncovering the real spending on the Friday before Christmas when absolutely no one was paying attention.
It’s time for America to know about this shadow debt. It’s time for the national debt to be cited not as $15.5 trillion, but as more than $61 trillion.