All eyes have been on the clear and present danger of the fiscal cliff—understandably—but there's a sound in the mountain range that's even scarier than the cliff. It's the sound made by an avalanche, the trillions of dollars of debt that's heading our way, gathering speed and mass. For most people, it's out of earshot now, and that's the way our government prefers to play it in its financial statements. Liabilities are not set out there in accordance with the well-established norms of the private sector, where this overhang of liabilities would set off alarm bells in the markets, with boards of directors in emergency sessions.
We'll come to why that's not happening, but let's consider first why we should regard our predicaments as gravely as any private company does on the path to bankruptcy.
We are on a trajectory of cumulative fiscal deficits that cannot possibly be sustained. We have gone from being the world's largest creditor nation, with no foreign debt at the end of World War II, to the world's largest debtor, with roughly half of our public debt held by foreign lenders. Over the last four years, our national debt has grown by more than $5 trillion to over $16 trillion. We have to service that debt. The Federal Reserve is keeping rates historically low but here's the cost of paying interest on the debt for fiscal 2012: $359,796,008,919.49
[Read more from Mort Zuckerman in U.S. News Weekly, an insider's guide to politics and policy.]
What do you get for that? Nothing.
The greatest fiscal challenge to the U.S. government is not just its annual deficit but its total liabilities. Our federal balance sheet does not include the unfunded social insurance obligations of Medicare, Social Security, and the future retirement benefits of federal employees. Only in the small print of the financial statements do you get some idea of the enormous size of the unfunded commitments. Today the estimated unfunded total is more than $87 trillion, or 550 percent of our GDP. And the debt per household is more than 10 times the median family income.
The public doesn't know about these awesome liabilities because the totals appear only in actuarial estimates. As Chris Cox, former chairman of the Securities and Exchange Commission, and Bill Archer, former chairman of the House Ways and Means Committee, recently noted in the Wall Street Journal, the real annual accrued expense of Medicare and Social Security alone is $7 trillion. The government's balance sheet does not include any of these unfunded obligations but focuses on the current year deficits and the accumulated national debt. Cox and Archer reported that the annual budget deficit is only about one fifth of the more accurate figure.
[See a collection of political cartoons on the budget and deficit.]
If the American public saw our financial statements in the same way that public companies report their pension liabilities, it would clearly see the magnitude of danger represented by the future borrowings that these liabilities to an aging population imply—borrowing on a scale that would not only bankrupt the programs themselves but the entire federal government. And to a worrying extent, we are locked into continued escalation by the fact that social insurance programs, as well as other mandatory programs, carry payments that are in accordance with automatic formulas written into law and are not subject to an annual spending limit. Today, less than 40 percent of our budget is actually decided by Congress and the president, down from 62 percent 40 years ago.
If we continue in these irresponsible ways, an eventual reckoning cannot be avoided. The liabilities are so huge, and multiplying so fast, that there will be one unavoidable demand as the various bills come to their due date. Show us the money!
How will the bills be honored? Let's remember that 100 percent of the payroll taxes for Social Security and Medicare are spent in the year that they are collected, leaving no leftovers for the unfunded obligations. And this doesn't take into account other risks, hardly minimal, like the fact that the Federal Housing Authority confronts a $16.3 billion net deficit after its latest audit that may force a taxpayer bailout for the first time in its 78-year history. And just four years from now, in 2016, the Disability Insurance trust fund will be fully depleted.
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