In a shocking admission for most of mainstream America, the former U.S.
comptroller general says the real U.S.
debt is closer to about $65 trillion than the oft-cited figure of $18 trillion,
thanks to unfunded liabilities which simply cannot be ignored. As The Hill reports, unless economic growth accelerates,
he warns, "you’re
not going to be able to provide the kind of social safety net that we need in
this country," adding unequivocally that Americans have "lost touch with reality" when it comes to
spending.
As The Hill reports, Dave Walker,
who headed the Government Accountability Office (GAO) under Presidents Bill
Clinton and George W. Bush, said when
you add up all of the nation’s unfunded liabilities, the national debt is more
than three times the number generally advertised.
“If you end up adding to that $18.5 trillion the
unfunded civilian and military pensions and retiree healthcare, the additional
underfunding for Social Security, the additional underfunding for Medicare,
various commitments and contingencies that the federal government has, the real number is about $65 trillion rather
than $18 trillion, and it’s growing automatically absent reforms,”
Walker told host John Catsimatidis on “The Cats Roundtable” on New York’s
AM-970 in an interview airing Sunday.
The former comptroller general, who is in charge
of ensuring federal spending is fiscally responsible, said a burgeoning national debt hampers the
ability of government to carry out both domestic and foreign policy
initiatives.
“If you don’t keep
your economy strong, and that means to be able to generate more jobs and
opportunities, you’re not going to be strong internationally with regard to
foreign policy, you’re not going to be able to invest what you need to invest
in national defense and homeland security, and ultimately you’re not going to
be able to provide the kind of social safety net that we need in this country,”
he said.
He said Americans have
“lost touch with reality” when it comes to spending.
Walker called for Democrats and Republicans to
put aside partisan politics to come together to fix the problem.
"You can be a Democrat, you can be a
Republican, you can be unaffiliated, you
can be whatever you want, but
your duty of loyalty needs to be to country rather than to party, and we need to
solve some of the large, known, and growing problems that we have,” he
said.
Of course, that is to say nothing of the other unfunded liability - America's Pension Ponzi, as we detailed previously. Just how big of a problem is this you ask? Well, pretty big, according to
Moody’s which, as we noted last month, contends that the largest 25 public
pensions are underfunded by some $2 trillion.
It’s against that backdrop that we present the following graphic and color
from Goldman which together demonstrate the amount by which state and local
governments would need to raise contributions to "bring plans into balance
over time." (see source)
From Goldman: Unfunded pension liabilities have grown
substantially. There are several factors behind this, led by lower than
expected investment returns and insufficient contributions from state and local
governments to the plans. The two issues are related. The assumed investment
return is used as a discount rate to determine the present value of
liabilities. The higher the discount rate, the lower the estimated liability,
and the lower the periodic payment into the fund a state or local employer is
expected to make. There is, of course, no clear answer about what the discount
rate ought to be, though the fact that the average assumption used by private
plans has continuously declined for more than a decade suggests that the rates
have probably been too high and that the current average assumption of 7.7% may
come down further.
Contributions have also generally been lower
than necessary to stabilize or reduce unfunded liabilities because of the rules
around how those unfunded liabilities are amortized. Payments into pension
plans are generally meant to account for the future cost of benefits accrued
during the current year, as well as catch-up payments equal to some fraction of
the unfunded liability left from prior years. Many plans target payment amounts
that would work off this underfunding over 30 years, though some use shorter
periods. However, the amounts of these payments are often back-loaded, with the
result that even if the “required” payment is made in full the unfunded
liability often grows.
A separate but related
issue is that some states have simply declined to make even the “required”
contribution, which is probably lower than it should be in any case due to the
factors just noted. For example, over the last few years New Jersey has made on
average only around 40% of the expected payment. New
accounting rules promulgated by the Government Accounting Standards Board
(GASB) will penalize underfunded plans with a lower discount rate, but the
change is fairly minor and, in any case, affects only the accounting; it will
not impose any new legal requirements to make the contributions.
If state and local governments are ultimately
forced to devote more resources to these obligations, the effect on state and
local spending would be noticeable. Exhibit 8 shows the states’ pension
contributions, as a share of gross state product, with two potential additions.
The first is the level that would be
required to simply meet the “actuarially required contribution.” To bring the
plans back into balance over time, further contributions would be necessary. In
aggregate this would raise government pension contributions by something like
$100bn per year (0.6% of GDP), lowering spending in other areas (or raising
taxes) by a similar amount. In theory, OPEB costs could push this
adjustment a bit higher.
No comments:
Post a Comment