How much is the total U.S. debt?

According to the U.S. Treasury, the national debt stands at $10.6 trillion. That works out to a debt load of almost $35,000 per person or $95,000 per U.S. household. You might have also heard that last year’s deficit was around $162 billion. Yes, the government did spend $162 billion more than it took in via tax revenue for the year 2007. But the truth is that we aren’t really running deficits in the billions. The United States is actually running deficits in the trillions.

The reason trillion-dollar deficits are not reported to the citizens is because the government doesn’t follow GAAP (Generally Accepted Accounting Principles). Corporations are required to use GAAP — and for good reason. GAAP requires that all financial obligations be placed on the books, even if the payments won’t be made until years from now. If a corporation owes $1M that doesn’t have to be repaid for 20 years, it still goes on the books as a liability, even though the payment date is in the future. As is apparent, that system is very sensical. However, the federal government doesn’t do it that way.

There is actually a good reason — albeit scary — why the federal government leaves liabilities off its books. Let’s take social security, for example. The thinking is that the government can always reduce social security benefits (or do away with them altogether) via legislation. If Congress can do away with social security benefits with a simple vote, they really aren’t a liability in the truest sense. Using this methodology, the national debt comes in at $10.6 trillion.

But how much is the actual total U.S. debt if you include future Social Security and Medicare obligations? According to the Government Accountability Office (GAO), the U.S. has $52.7 trillion in unfunded committments.

A total commitment of $52.7 trillion works out to approximately $173,000 per person or $471,000 per U.S. household. If you are reading a mortgage blog, there is a good chance that your income is above average. Using our progressive tax system, that means that you pay a higher tax rate on a larger income than the average person. Just as you pay more taxes, you can bet that you will be expected to shoulder more of these unfunded commitments than the average U.S. household. Though the total liability works out to approximately $471k per household, the average per household for readers of this blog would be much higher, perhaps into the millions for some. Also remember that these numbers do not account for the future obligations of state and local governments.

As you can see from the above chart, almost $7 trillion relates to social security, whereas $34 trillion pertains to Medicare. Interestingly, health care issues present a funding challenge almost five times that of social security.

How do we solve this problem? Well, for starters, the tax man cometh. In addition to raising taxes, the GAO recommends that we increase the retirement age, modify the income replacement formulas for middle and upper income earners, and adjust the social security COLA (cost of living adjustment) formula. They also want to consider mandatory savings via payroll deductions. For example, 2% of your paycheck might be placed in a retirement account for your sole benefit.

The reality is that things are going to look different in the future. You might find yourself calling Goodwill to pick up your treadmill and Bowflex because grandma is moving into the basement, her benefits having been reduced to a point where she can no longer support her own household. Due to the financial mess we have gotten ourselves into, I see a future wherein there will be more focus on necessities and less on luxuries. Unfortunately, the government cannot simply print more money to cover these obligations, or we risk hyperinflation and a complete collapse of our economy.

The only way I see to correct the problem is to completely reform the entire system, which means cutting entitlement benefits. The elderly of the future will probably not be self-sufficient to the extent that they are now, supporting their own households. It sounds harsh, but there won’t be as much money available for medical procedures for the elderly. We currently spend a lot of money to extend the lives of people who are already at the final stages of life. Costly medical procedures designed to extend life a few months at best will be a thing of the past.

Without a doubt, things are going to be different in the future. It will be interesting to see how reduced benefits affect the housing and mortgage markets. If the elderly of the future are forced to move in with family due to reduced entitlement benefits, there will be more houses on the market. It will be interesting to see how things play out.

by Wade Young