Jolt Of Rising Fiscal Exposure

In the past few weeks we have taken a look at the scary picture of the federal fiscal disaster that is looming on the horizon as more and more of the federal budget is being gobbled up by programs that target largely the aging population of the United States.

Although it will be politically impossible to take away the benefits that are currently being claimed by seniors, that should not prevent policymakers from slowing the growth of benefits for future beneficiaries. The term “fiscal exposure” is given to responsibilities, programs and activities that may require federal resources at a future time. A complete tally of the estimated fiscal exposure resulting from promised benefits already on the books gives one a much clearer picture of the deteriorating condition of federal finances.

According to the Government Accounting Office (GAO) the federal government was in the fiscal hole by approximately $53 trillion at the end of the federal fiscal year that closed on September 30, 2007. Of that amount, about $11 trillion stems from explicit liabilities that the federal government is legally obligated to pay such as publicly held debt, military and federal civilian pensions and retirement health benefits. Another $1 trillion represents contractual requirements that the federal government is expected to fulfill when or if the specified conditions are met. These include federal insurance, loan guarantees and leases.

The largest component of the current fiscal exposure is unfunded commitment to beneficiaries of Social Security and Medicare benefits for both current and future participants. The fiscal exposure for Social Security, Medicare hospital insurance, Medicare outpatient care, and Medicare prescription drug programs contributed nearly $41 trillion to the federal fiscal hole.

Although most people would see any reduction of those benefits as heresy or as the federal government going back on its promises, Congress and the President can change the programs that either increase or decrease the value of the anticipated benefits.

For example, lawmakers have increased the amount employers and employees pay out of their paychecks for these programs. They have changed the cost-of-living adjustment formulas and increased beneficiary premiums for Medicare. And lest anyone believe that changes to the programs are illegal, it should be noted that the U.S. Supreme Court has ruled that the benefits under these programs can be changed at any time through legislation.

The same GAO tally also looked back at the growth of these components of fiscal exposure since the year 2000. Explicit liabilities, such as public debt, grew by 57% between the years 2000 and 2007 while commitments such as federal insurance; loan guarantees and leases grew by 97%. The most startling growth occurred in the future benefits category of Social Security and Medicare which grew by 213% over the seven-year period.

Just the fact that the fiscal exposure runs into the trillions of dollars boggles the mind. To put it in more realistic terms for the average taxpayer, the GAO recalculated the $53 trillion burden as being equal to $175,000 per person living in the United States at the beginning of federal fiscal year 2008 or October 1, 2007. They also put it another way, the $53 trillion millstone translates into $410,000 per full-time worker employed during the year 2007 or about $455,000 per household in the United States. By comparison, the median household income in the United States was $48,201 during fiscal year 2006 (latest year for which that data is available).

What would it take to right the fiscal ship? Well, according the annual report of the Social Security and Medicare Trustees for 2008, it would take a combination of an immediate 14% increase in payroll taxes up from 12.4% to 14.1% (combined employer and employee contributions) AND a 12% cut in benefits in order to bring Social Security into actuarial balance for the next 75 years.

Similarly, the Trustees of the Social Security System report that Medicare’s dedicated income from all sources will not come close to meeting the anticipated expenses. They note that by the year 2040, actuarial forecasts indicate that general revenues will have to provide over two-thirds of the resources to meet the anticipated demand for benefits where general revenues currently provide about 40% of the financing of Medicare benefits.

If taxpayers think the current credit crisis is a problem, wait until Social Security and Medicare hit the wall! But we truly cannot wait. Our elected officials need to act now. Next week we will outline an action plan.

Lowell L. Kalapa is the president of the Tax Foundation of Hawaii. Mr. Kalapa’s commentary is printed each week in the Maui News, West Hawaii Today, Garden Isle News, and the HawaiiReporter.com.