Social Insecurity

The ENRON Corporation was supposed to be an energy company, supplying the nation, in creative ways with the energy we need to heat our homes and cook our food. As it turns out, most of their creative energies went into cooking the books. Thousands of workers and investors saw their fortunes and their pensions wiped out, while the nation heaped well-deserved scorn on the perpetrators. However, the accounting chicanery of ENRON is small beer compared to the accounting trickery practiced by the federal govmint.

It is sad enough that the President can “boast” that he has reduced this year's deficit to a mere $163 billion. Alas, even this boast is a lie. But in truth, the real deficit is a staggering $497 billion. Nearly half a trillion dollars. How is this done? Scott Burns in Sunday's Dallas Morning News puts it this way:

The September statement shows that the "on-budget" ran a deficit of $344.3 billion in fiscal 2007. The "off-budget" ran a surplus of $181.5 billion. (The off-budget is dominated by Social Security, Medicare and other programs with trust funds.) Add the two figures and you get the "unified budget," that $162.8 billion.

But that's only part of the story.

In the last eight years, we've had two years of reported surpluses and six years of reported deficits. Altogether, the total reported deficit has run $1.3 trillion. But if you examine another figure – gross federal debt – you'll see something strange. First, it has increased in each of the last eight years, even though in two of the years surpluses were reported. Second, gross federal debt (which includes the obligations held by the Social Security and Medicare trust funds) has increased much faster than the deficits – $3.3 trillion over the same eight-year period.

That's $2 trillion more than the reported $1.3 trillion in deficits over the period.

How do they manage to under-report the deficit by $2 trillion? That's easy (Ken Lay would have been proud of this trick): they credit the various Social Security and Medicare “Trust Funds” with interest payments that aren't actually paid. Instead, they just place “non-marketable” securities in the funds. The budget therefore doesn't take a hit, while the Trust Funds show an accounting increase, even though no money is received. Thus they can perpetuate the fiction that Social Security is “sound” for the next 34 years; in fact, it will run out of cash in six to nine years. Indeed, the disability fund has been running at a cash loss since 2005 and Medicare part A (The Hospital Fund) ran out of cash this year.

I am not (for once) blaming George Bush alone for this deception. Clinton, the elder Bush, and Ronald Reagan all engaged in the same chicanery. It began on Reagan's watch with the “voodoo economics” of the Laffer Curve. That famous, and famously discredited, curve was supposed to raise revenues by lowering taxes. But, according to a report by the Treasury Department, it was a dismal failure. Reagan had to scramble to raise revenues, and tinkered with the tax laws nearly every year (this was before the Chinese government decided to simply lend us whatever amount we wanted—too bad for Ken Lay that he wasn't on better terms with the Chinese). The most lucrative source of new income was raising the Social Security taxes by 25%. No doubt such a move could be justified, if the SS funds really got the money, which they didn't; it was merely used to cover the big losses from “supply-side” economics.

Next year, the first wave of post-war baby-boomers will be eligible for early retirement, and for full benefits within four more years. The next president will not have the use of the trust funds to balance the budget; in fact, they will be a big source of imbalance, as the general revenue funds will have to pay out actual cash to retirees, just as retirees had paid actual cash to make the deficits look smaller. The worthless paper in the Trust Funds can only be redeemed by increasing taxes, lowering expenses, inflating the currency, or by a combination of all of the above. Or it can simply default.

My guess is that the government will not be able to meet its obligations; it will have to default on its debt. This default can take one of two forms: the government can default to public and foreign holders of its debt, or it can default on the debt held by the trust funds. I suspect it will do the latter, since some of the foreign governments holding the debt are great powers who don't like being cheated. So we will cheat our own people. What else is new? Mind you, I am not totally opposed to some adjustment. I am 60 years old, and it seems incredible to me that someone as young and as good-looking as I am (that's my story, and I'm sticking to it) will be too old to work in a mere five years. I wouldn't mind working a few years more to help relieve my children of an intolerable tax burden. But I don't think that even that will help. We have played by the rules of voodoo economics for too long, and we are about to conjure up a fiscal demon.