Everyone knows that owing more in debts than you have in assets is a bad thing. One gets in that precarious situation by spending more than is justified by income. People either tighten their belts and cure the problem — or file bankruptcy and pass on their financial problems to others.
What does government do when their financial fat is in the fire? It depends on which government one is considering.
Mississippi law forbids the state to operate at a deficit. When expenses exceed income, drastic accounting slights of hand are required to make it appear that the budget is balanced. This can work for a few years but eventually, there are no more rabbits in the hat and reality must be addressed. In a recent newspaper column, state representative Cecil Brown wrote that this year will be telling for Mississippi since the Legislature has exhausted all means to avoid either massive budget cuts or raising taxes.
To put it in the vernacular: The chickens are coming home to roost.
U.S. government is in worse shape?
Of course, whatever financial problems we face here in Mississippi, they are still miniscule compared to the federal government’s situation. Let’s look at some really big numbers.
The U.S. government counts about $1 trillion in assets and has recorded liabilities of about $8 trillion, rendering an apparent deficit of $7 trillion, give or take a few hundred billion. Those statistics, and those that follow, are from an article by David M. Walker, Comptroller General of the United States, from the April 2004 issue of the Journal of Accountancy.
If the problem is no worse than these statistics indicate, we would really be OK. If we divvy up the financial shortfall it would amount to about $24,000 for every man, woman and child in the United States. If that was as bad as it got and the problem was being addressed, we could handle it with help from a little Alka-Seltzer and a few aspirin.
Tip of the iceberg
Unfortunately, the admitted situation is only the tip of the iceberg. The term “recorded liabilities” does not include some really big-dollar stuff. Excluded are veteran’s healthcare benefits and the looming deficit in Social Security and Medicare. Since these liabilities are not currently payable, the federal accounting system ignores their existence. Comptroller General Walker estimates that the deficit burden with these items included would likely be $100,000 added to the admitted $24,000 for every man, woman and child in the United States. We’re talking some serious bucks here!
Can this be true? I suspect that, in fact, it is true. The demographics of the boomer generation are well known and their likely impact on Social Security can be reasonably projected. Boomers will begin reaching age 65 in 2011, a mere seven years from now. Their drain on government resources is going to be bigger than most people seem to imagine.
How did we get here and what do we need to do? Getting here was easy. The single most important priority for members of congress is re-election and discussing problems that require sacrifice run in the face of re-election. Thus, the logical solution is to accentuate the positive and ignore the negative. Announce that new highway project or military base expansion and don’t mention the looming threat of Social Security. Telling the American public that their taxes are going to go up and up and up is no way to fill a dance card.
No simple answers
As to what needs to be done, the answer is complex. First, the American people need to be told what the federal financial situation really is. That can’t be done because the federal accounting system is so fragmented and inaccurate that benchmark statistics cannot be developed. This situation would be intolerant in the business world but, apparently, it’s been just fine for our national government.
We need to notify our elected representatives and demand that a comprehensive system of financial reporting be implemented and the result communicated honestly and regularly to the American people. Now, just reporting the situation will not change it. When we begin having to pay Social Security benefits in cash rather than government IOU’s the burden on our resources is going to be overwhelming with our current tax rates.
Higher taxes? You bet. A lot higher. Government only has two ways to pay off its obligations: taxes and inflation. In general, the American tax burden is around 20% of our gross income. Ironically, this percentage doesn’t vary much from year to year, or decade to decade. It’s going to have to vary now in order to maintain our commitments to Boomers, including me.
In addition to demanding an adequate accounting system for our government, I suggest we reduce the exemptions that have taken so many lower income Americans off the tax rolls entirely. I think this was a mistake. One doesn’t value free stuff and everybody needs to have ownership in our government. Even if a person can only pay $5 a month in taxes, they need to participate in the system and become taxpayers.
Finally, we need to either demand that government gets smaller, I mean really decrease in size by providing fewer services more efficiently, or get ready to pay higher taxes. This decision needs to be made for both state and national government since both are in the same financial shape as the result of promising too much to too many and deceiving the public about who’s going to pay the bills.
Several readers have told me that my recent column showing how to estimate their retirement income depressed them because maintaining our pre-retirement lifestyle is going to dissipate our savings pretty quickly. Well, this column probably won’t buoy them up much either. However, I promise that next week’s column will be light and airy.
Thought for the Moment—
It is what you are inside that matters. You, yourself, are your only capital.
— physicist Vladimir Zworykin (1889-1982)
Joe D. Jones, CPA, is publisher of the Mississippi Business Journal. Contact him at firstname.lastname@example.org.