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
Wade – Thanks for putting this in perspective! These are amzing numbers and I can not beleive that the government can get a way with these kind of accounting methods. They would never let a normal company get a way with these kind of shennanigans. It will be interesting to see how things play out.
The national debt just makes me sick and there is not much the common every day guy can do to fix it. Make me think of “Dave” with Kevin Kline where he does a line by line budget adjustment to get the money needed to pay for a pet project.
Dave
Wade, just a phenomenal post from you this time. Very few people know the true debt level once you consider the unfunded liabilities of SS and Medicare. Nice work. And yes I wonder how all this will affect Boulder Real Estate and Mortgages!
You mention near the end about the government printing money and causing inflation. Have you ever seen the Debt=Money video? It is excellent if not scary:
1) Debt = Money Link: http://video.google.com/videoplay?docid=-9050474362583451279
(the link above shows it full size, but sometimes it cuts out halfway thru the video. If it does, you can continue it with the link below)(same video, just smaller size)
http://theobvious.typepad.com/blog/2008/10/money-as-debt.html
plus, you might be interested in a “Fed” related vid, since we use that
false term in our business so often (I call them the Private Reserve!)
2) Fed Scam, er, System http://video.google.com/videoplay?docid=6507136891691870450
Yes, the future is going to be interesting, for sure
Steve Higgins
Boulder Mortgage Professional
http://www.BoulderLoanRanger.com
All true. And according to latest reports, Obama is planning to cut taxes by another $300 billion. You might want to factor that into the calculations. Washington’s concept of facing the facts is a little bit different…
Thanks for the information – I was trying to locate the total US debt at the end of 2008. Your notes share a $52.7 trillion dollar figure – but the chart shows that this is the 2007 total debt.
Do you have a 2008 figure?
Thanks
Don
Don–
Sorry, but this was the most recent I could find. I have heard that the total obligations are about $10T more now, but I couldn’t find that from a government source. It is really quite difficult to get basic financial numbers from the government. I have spent time on the sites of the Federal Reserve, the Census Bureau, the IRS, and others having to simply give up because I couldn’t find basic information. It’s frustrating.
this website can help you alot and it even tells you the graph of 2006 and 2007
Being a small business owner, if I assumed such a debt load (relatively speaking, of course) my business would not survive. Passing debt on to the next generation is wrong – no other way to put it. Blame, however, does not solely lie with the government. Individuals must take greater care to live within their means and use prudence. Unbridled consumption can no longer be the order of the day.
Deficit spending to get us out of the recession is one thing but a multi-pronged strategy to solve health care as well while we’re in such trouble doesn’t seem very prudent.
The interesting thing about the federal debt is that the majority of it is NOT related to spending. It is debt owed to the Federal Reserve. The Fed creates the money out of nothing and then lends it to us (the government) at interest.
Hi, Great writing! Didn’t expect to find this info on a mortgage website as I did the search but you wrote a clean, refreshing and though provoking article. Had me thinking about issues I hadn’t touched on before which is strange because I’m a gold dealer and talk about this all day long. Thanks again! P.S I bookmarked the site.
John Halloran
CEO Certified Gold Exchange, Inc
All true. And according to latest reports, Obama is planning to cut taxes by another $300 billion. You might want to factor that into the calculations. Washington's concept of facing the facts is a little bit different…
I'm very familiar with GAAP and have inquired of SS why they don't follow it. Silence. However, all things considered what happened to all the dough I paid into Medicare and SS??
The IRS gets all excited if I am slow is paying. Yeah, it was primarily socialist when shoved in by FDR (another loser president) But the money was taken involuntarily so I couldn't invest it my way–so I'm forced to accept big government that can't even manage ANY program and must plan on getting the return (my money back) offered by wasteful government.
Nobody running for office will get elected if my money is stolen and budgets are not trimmed back. Not some slight of hand like Obamacare or stimulus (those signs cost about $1200 each).
This isn't temporary. If we had a smaller government spending far less of our money then Obama wouldn't be so low in the polls. Cuts of departments have to be permanent including Obama's pay and expenses. The White House should be rented to Obama, SS protection cut way back, a Piper Cub should be Air Force One–after all Mr. President how about “spreading” (redistributing your wifes wealth) to people who, unlike you, actually work.
How about the wife funding a scholarship program at Harvard–that is a nice left wing redistribution. “by the people, for the people” somehow has changed 180 degrees to be “by the elected and only for the elected” Get Pelosi, Reid, the VP and yourself out of Dodge. We the People demand it.