A Law That Will Expose the Unfunded Liabilities of the U.S. Government
Because you are a regular reader of this website, you are well aware of the problem of the unfunded liabilities of the United States government.
You probably remember the figure that has been cited by Prof. Lawrence Kotlikoff of Boston University. He has estimated that the present value of the unfunded liabilities of the federal government as of 2012 totaled $222 trillion. This was not the unfunded liability in terms of future income. This is the present value of the unfunded liabilities. Obviously, there will be a default.
The public is unaware of any of this. I suspect very few people you know have ever heard of this problem or this estimation of what the unfunded liability is. Congress really does not know. Most members of Congress have not heard about it. So, to help remedy this situation, several members of Congress and the Senate have decided to co-sponsor a piece of legislation which would force the Congressional Budget Office to produce what is basically inter-generational accounting. It would force the CBO to provide the statistics on what the total unfunded liability is.
There will be great debate over which system of interpretation should be used to make this estimation. There's no doubt that the CBO, if forced by Congress to do this, will reject Kotlikoff's version. But any version is going to show that the government is many trillions of dollars in the hole.
It turns out that 12 Nobel prize-winning economists are in favor of this legislation. This is one of those situations where Congress may decide to pass the bill, and the President may sign it, simply because there's no real opposition to it, and there seems to be no real harm. Of course, from the point of view of getting future legislation passed, from that time on there will be issues raised about how the legislation will be funded. So, politically, making this statistic available to the public, or at least to those voters who pay attention to such issues, the act will create some resistance to government spending. Politicians may understand this, and may decide not to vote for it. Here's a presentation from the website that promotes the act: http://www.theinformact.org.
The INFORM ACT requires the Congressional Budget Office (CBO), the General Accountability Office (GAO), and the Office of Management and Budget (OMB) to do fiscal gap accounting and generational accounting on an annual basis and, upon request by Congress, to use these accounting methods to evaluate major proposed changes in fiscal legislation.The INFORM ACT is a bi-partisan initiative. The bill was introduced Senators Kaine (Democrat from Virginia) and Senator Thune (Republican from South Dakota) and is being co-sponsored by Senator Coons (Democrat from Delaware) and Senator Portman (Republican from Ohio). The Bill will shortly be introduced on a bi-partisan basis in the House of Representatives.
Background The fiscal gap is a comprehensive measure of our government's indebtedness. It is defined as the present value of all projected future expenditures, including servicing outstanding official federal debt, less the present value of all projected future tax and other receipts, including income accruing from the government's current ownership of financial assets.Generational accounting measures the burden on today's and tomorrow's children of closing the fiscal gap assuming that current adults are neither asked to pay more in taxes nor receive less in transfer payments than current policy suggests and that successive younger generations' lifetime tax payments net of transfer payments received rise in proportion to their labor earnings.
David Walker was the Comptroller General of the United States. He quit in 2008. He has written a very good article on what is at stake here.
When it comes to addressing our growing national debt, there is no shortage of disagreement between the political parties in Washington. But there is one thing they should both agree on: to tell the truth about our nation's growing fiscal imbalance.That's hardly the case today. Fiscal reporting by the federal government -- whether through the CBO or the Office of Management and Budget -- vastly underestimates the size of the problem we face and the inter-generational consequences of remaining on our current path.
For example, trillions of dollars in unfunded promises to current and future retirees through programs like Social Security and Medicare are not captured in either the reporting of this year's deficit or our total national debt. In addition, cost projections on pending legislation only look 10 years into the future -- hardly far enough to gauge their long-term budgetary impact.
As a result, the real financial burdens being placed on young people and future generations are not adequately disclosed and action to fix this problem is being delayed.
Our elected officials have been hiding behind myopic budgeting and accounting practices for too long. But now some genuine leaders in Congress are taking steps to increase transparency and accountability in our federal budget system. Wednesday, Senators John Thune (R-S.D.) and Tim Kaine (D-Va.) are introducing the INFORM (Intergenerational Financial Obligations Reform) Act, with co-sponsors Senators Rob Portman (R-Ohio) and Chris Coons (D-De.). This bill, also championed by the youth-led "The Can Kicks Back" campaign, would make it more difficult for Washington politicians to kick the can down the road by providing information about the long-term impact of today's unsustainable fiscal policy.
Specifically, the INFORM Act would expose both public and political leaders to two important but often ignored realities.
First, our real fiscal challenge lies ahead of us. With an aging population, rising healthcare costs and mounting interest expense, federal spending is set to automatically and dramatically increase the "mandatory" part of our budget -- which includes Medicare, Medicaid, Social Security and interest on the mounting federal debt. Without social insurance program reforms to slow the spending increase, and comprehensive tax reform to encourage economic growth and generate more revenue, our debt will inevitably reach a perilous level.
Second, young people and future generations will disproportionately shoulder the burden of our fiscal imbalance. The bill will eventually come due -- not to those responsible, but to their children and grandchildren.
Consider, for example, that the average Medicare beneficiary will likely receive $3 in lifetime benefits for every dollar he or she paid into the program. The difference must be borrowed and, eventually, be paid for by a future tax hike or spending cut. Current budget analyses, however, do very little to show these intergenerational tradeoffs.
The new legislation would shine a light on these budget realities by closing key gaps in current fiscal reporting. It would require that the CBO, the Government Accountability Office and OMB incorporate fiscal gap and generational accounting analyses in their annual budget projections and, in the case of the CBO, its analysis of pending legislation. As the former Comptroller General and head of the Government Accountability Office, I know this would be a worthwhile exercise in painting a more vivid fiscal picture for the public.
The fiscal gap disclosure would show the difference between total future projected spending and total future projected revenue. The usual budget gimmicks will have no place to hide. In addition, the generational accounting disclosure would show the distribution of net lifetime taxes (the difference between taxes paid and transfers received) by age group -- assuming the fiscal gap is left to future generations to close.
These proven analyses have been used by dozens of countries, the International Monetary Fund and even the Social Security Trustees in their annual report. Moving forward, they can be used to more effectively judge proposed policy changes by asking: To what extent does the policy widen or narrow our long-term fiscal imbalance? And to what extent does the policy increase or decrease the financial burden being placed on future generations?
Under current budgeting practices, lawmakers are not able to adequately answer either question.
To make better decisions for tomorrow's Americans, today's elected leaders need to have better information -- and the integrity to honestly share that information with the rest of us. Passing the INFORM Act would be a meaningful step in that direction.
As you can imagine, I hope this legislation becomes enacted into law.