SPECIAL REPORT ON THE U.S. ECONOMY: The $44 Trillion Abyss

FORTUNE.com ^ | 12/03 | Anna Bernasek

[Veracious Poet]

Last fall Paul O'Neill, then Secretary of the Treasury, wanted a simple answer to a thorny question: How prepared was the nation today to pay all its future bills? Two government experts worked for months to calculate the answer. Their findings, which shocked even them, were never published—the Bush administration made sure of that. The reason for the silence was that by the time the two researchers had completed their study, O'Neill had been thrown out of the Treasury and replaced by the more politically astute John Snow. No savvy administration power player would dare point out, right in the middle of tax-cut season, that there was a huge hole in the country's finances—a $44 trillion hole.

That's the kind of Washington tactic that makes Larry Kotlikoff angry. So angry, in fact, that the normally composed and carefully spoken academic starts ranting about a government conspiracy to keep us all in the dark. He even refers to this particular episode as "the great Treasury cover-up." And once you start Kotlikoff on the subject, it's hard to stop him. "I hate politicians," he says, without pausing for breath. "These people are so...

[Southack]

Not exactly "Breaking" news, but thanks anyway, I guess...

[Veracious Poet]

Some more info:

http://www.bullmarket.com/fin/112003.php3#3

$44 TRILLION BUDGET SHORTFALL THREATENS U.S. FUTURE

The U.S. currently faces a $44 trillion budget shortfall, which must be addressed soon. Five years from now, millions of baby boomers will begin to retire. This will put a large strain on the budget from increased payouts of Social Security and Medicare benefits.

TODD'S TAKE: The budget problems will come from a $7 trillion shortfall in Social Security and a $37 trillion hole in Medicare. These numbers are based on current government revenue and spending. Economist and Boston University professor Larry Kotlikoff told Fortune Magazine that the U.S. is in big trouble if it doesn't sober up and face the pending budget problem. He has written 11 books, 80 journals and 37 op-ed pieces about the financial mess we're in. He has testified on Capitol Hill before Congress. But no one is listening.

The numbers come from a 2002 government report that never saw the light of day. It was commissioned by Paul O'Neill, then Secretary of the Treasury. The authors' -- former students of Kotlikoff's -- were shocked by their own findings, but the Bush administration made sure they were never published.

To produce the report, they used the basic principles of Kotlikoff's generational accounting. They added up everything the government expects to spend -- Social Security benefits, debt-service payments, salaries, and so forth, far into the future and put it in today's dollars. Then they added up all the income the government expects to earn in the future -- taxes, income from government assets, all in today's dollars. They made certain key assumptions about the rate of growth in government spending, taxes, medical costs, and hundreds of other things. They came up with a $44 trillion gap between income and payments.

One of their assumptions was to use a conservative estimate for the increase in costs. They used the government's own numbers. In fact, they used a more optimistic number than the government itself. For medical costs, they used a number 1% greater than GDP, instead of the more common 3%. And after all of this they came up with a $44 trillion hole.

How big is $44 trillion? 1.5 times the size of the entire world's GDP. Or, the entire value of all real estate, stocks and bonds that we own in this country. And as Fortune says, "This amounts to a massive weight on the economy."

The solution is complicated, but not insurmountable if the government acts now. The formula to help prepare for the shortfall is to calculate future spending plus revenues collected. The math then inputs future growth variables for expenses such as Medicare and Social Security. The formula to help prepare for the shortfall is to figure out what needs to be spent in the future, and then add up all that the government expects to earn -- in today's dollars. This is similar to balancing your checkbook for the few years. You know how much you expect to earn and how much you will have to pay out in expenses of running your household. This is tricky, as growth numbers vary widely among experts. But it's something that must be done.

It turns out that to rid ourselves of this problem, Federal taxes would have to increase 69%, and payroll taxes would have to double. Solving this problem will hurt badly.

If they had used a number of 1.5% greater than GDP, rather than 1%, the $44 trillion hole goes to $65 trillion. And the $44 trillion is growing at the rate of $1.6 trillion a year (that's $1,600 billion. To put that in perspective, the budget shortfall this year will be about $600 billion.) Unless something is done to stop it.

I hope someone out there will get excited about the situation, like Kotlikoff, and do something. We are generally better off than our parents, but we're about to begin the process of leaving our kids with a burden that will make life very tough for their kids, and for generations to come.

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Feel free to comment on this nightmare scenario that America doesn't want to acknowledge is out there...

[Veracious Poet]

"Not exactly "Breaking" news, but thanks anyway, I guess..."

Well, have you seen this article before...it's sure news to me and I'm sure most of the public has no idea about this boondoggle - Interesting how they keep giving away the farm on Medicare when there's "a $37 trillion hole in Medicare".

Talk about pandering...

[putupjob]

This is the big dream of the future that we have been hearing from the Democrat Party all these years. All the social welfare spending will bankrupt everyone and everything and socialist masters will then be in charge of dispensing everyone their ration of food, water, shelter and will also control what each and everyone does.

It's really working for them. It really is. We have less than 20 years left until we become an impoverished people with our lives controlled by our socialist task masters.

[Ernest_at_the_Beach]

This is why we have inflation!

[Veracious Poet]

Well, I wasn't aware that Paul O'Neill was a card-carrying democrap when he was Bush's Secretary of the Treasury...here's his bio FYI:

http://www.ustreas.gov/organization/bios/oneill-e.html

BTW, from what I understand this debacle is due to start kicking-in about 5 years from now, when massive numbers of baby-boomers retire.

There gonna have to inflate the dollar a whole helluva lot to cover those retirement benefits! ;-)

[Jim Robinson]

Well, I take it the left finally sees the inevitable outcome and consequences of the New Deal, The Great Society, and HillaryCare and is now ready to start privatizing Social Security and Medicare and dropping all plans for socialized medicine. Right?

[CasearianDaoist]

The solution, of course is to cut the size of government by 50% and cut govenrment payrolls by even more. Not that it will happen.

[Veracious Poet]

"Well, I take it the left finally sees the inevitable outcome and consequences of the New Deal, The Great Society, and HillaryCare and is now ready to start privatizing Social Security and Medicare and dropping all plans for socialized medicine. Right?"

I dunno, but it looks like a BIG problem to me, and I don't think there are any easy answers...I don't envy Bush at all on this issue he inherited, especially with the ongoing War on Terror.

As far as the left is concerned, I'm sure they would continue spending to hell freezes over if we'd let them...

[panaxanax]

All the more reason to buy as much gold as you can afford. For over a week now gold has closed at over $400. The profit takers started selling when it hit $410 @ oz. This brought the price down, but right now it is $403.00.

When gold drops down to the $380.00 level, which it will after Christmas, my suggestion is buy whatever you can. Gold will only go up in value in the next five years.

Just my 2 cents.

[Ernest_at_the_Beach]

As far as the left is concerned, I'm sure they would continue spending to hell freezes over if we'd let them...

California is the example for what they would do!

[DoughtyOne]

This is Mr. Peabody saying, "Tune in again next week for New Deal meets Raw Deal, or The Nanny State Runs out of Diapers." Socialism in all it's glory... Now it's unanimous. Not only has it never worked, we've even tried it and it won't work here either.

[superloser]

A little inflation is doable, but to cover a $44T hole would require Weimar-style hyperinflation.

Never mind that most of this "spending" has automatic inflation escalators built into it.

Looks like a Triple-Ought situation in the making unless spending and entitlements are drastically curtailed.

[leadpenny]

Try doing what FDR started and subsequent administrations have gone along with and you'd be arrested for running a Ponzi or Pyramid scheme. Chain Letters also comes to mind.

[Ed_in_NJ]

This is not just a 'left' problem -- this is a 'both' problem.

[metesky]

Well, I take it the left finally sees the inevitable outcome and consequences of the New Deal, The Great Society, and HillaryCare and is now ready to start privatizing Social Security and Medicare and dropping all plans for socialized medicine. Right?

Great sense of humor, boss.

[eno_]

It's a little tendentious that the article is called "The $44 Trillion Abyss" rather than "Any Government That Makes Medical Care an Entitlement Will Go Bankrupt."

THAT is almost all of the problem. Privatizing Social Security would take care of the rest.

[OldFriend]

The only nightmare scenario facing America and the rest of the world would be the election of a demonrat to the presidency.

However, the deficit is already decreasing due to higher revenues coming into the treasury.

As the economy grows the deficit will decrease. The budget is expected to be in balance within the decade.