Federal Government’s 2017 Fiscal Shortfall Is 74% Worse Than Reported Budget Deficit

Agresti, J. D. (2018, March 7). Federal Government’s 2017 Fiscal Shortfall Is 74% Worse Than Reported Budget Deficit. Retrieved from https://www.justfactsdaily.com/federal-2017-fiscal-shortfall-74-worse-than-deficit
Agresti, James D. “Federal Government’s 2017 Fiscal Shortfall Is 74% Worse Than Reported Budget Deficit.” Just Facts. 7 March 2018. Web. 13 April 2024.<https://www.justfactsdaily.com/federal-2017-fiscal-shortfall-74-worse-than-deficit>.
Chicago (for footnotes)
James D. Agresti, “Federal Government’s 2017 Fiscal Shortfall Is 74% Worse Than Reported Budget Deficit.” Just Facts. March 7, 2018. https://www.justfactsdaily.com/federal-2017-fiscal-shortfall-74-worse-than-deficit.
Chicago (for bibliographies)
Agresti, James D. “Federal Government’s 2017 Fiscal Shortfall Is 74% Worse Than Reported Budget Deficit.” Just Facts. March 7, 2018. https://www.justfactsdaily.com/federal-2017-fiscal-shortfall-74-worse-than-deficit.

By James D. Agresti
March 7, 2018

The federal government reported a budget deficit of $666 billion for its 2017 fiscal year, but a new comprehensive accounting published by the U.S. Treasury shows that federal finances deteriorated by $1,157 billion in 2017—a figure 74% worse than the deficit. This thorough accounting is mandated by a federal law that requires the Treasury and White House to produce an annual report on the “overall financial position” of the federal government.

Data from this report also shows that the federal government has amassed $89.9 trillion in debts, liabilities, and unfunded obligations. This amounts to more than $700,000 for every household in the U.S., or 92% of the nation’s private wealth. This includes the combined value of every American’s assets in real estate, corporate stocks, small businesses, bonds, savings accounts, cash, and personal goods like automobiles and furniture.

This Treasury report contains information that vitally impacts U.S. citizens, but a search of Google News shows that no media outlet has reported on it, even though it was published more than two weeks ago.

“A Complete Picture”

Unlike the federal budget, which primarily uses cash accounting, the Treasury’s Financial Report of the United States Government uses accrual accounting. The Government Accountability Office explains that this accounting method “is intended to provide a complete picture of the federal government’s financial operations and financial position.”

Cash accounting is the simple process of counting money as it flows in or out, while accrual accounting measures financial commitments as they are made. For example, when federal workers earn pension benefits, accrual accounting counts these obligations in the year they are earned. Cash accounting does not count such liabilities until they are paid, which is often years or decades later.

The federal government requires large corporations to use accrual accounting for their pension plans, because this is the “most relevant and reliable” way to measure their financial health. The same applies to other retirement benefits like healthcare. The official statement of this rule explains that “a failure to accrue” implies “that no obligation exists prior to the payment of benefits.” Since an obligation does, in fact, exist, failing to account for it “impairs the usefulness and integrity” of financial statements.

Nevertheless, the federal budget, which is the “government’s primary financial planning and control tool,” is not bound by the rules that government imposes on the private sector. In the words of the U.S. Treasury, the federal budget is prepared “primarily on a ‘cash basis’.”

This has major consequences for future taxpayers, partly because pension and other retirement benefits are a large part of compensation packages for government employees. When these benefits are included, civilian, non-postal federal employees receive an average of 17% more compensation than private-sector workers with comparable education and work experience. Postal workers receive even greater premiums ranging from 25% to 43%.

In 2016, federal, state and local governments spent $1.9 trillion on employee compensation. Paying this takes an average of $15,176 from every household in the United States.

The Treasury report reveals that the federal government currently owes $7.7 trillion in pensions and other benefits to federal employees and veterans. To pay the present value of these benefits would require an average of $61,000 from every household in the United States. Yet, the vast majority of these liabilities are not reflected in the national debt.

A similar situation exists with Social Security and Medicare. Contrary to popular belief, these programs don’t save worker’s contributions for their retirement. Instead, they are social programs that provide benefits to the aged and disabled mainly by taxing people who are currently working. Hence, Social Security and Medicare are sometimes called “pay-as-you-go” programs.

In contrast, the U.S. Bureau of Economic Analysis states that “federal law requires that private pension plans operate as funded plans, not as pay-as-you-go plans.” The reasons for this, as explained by the American Academy of Actuaries, are to increase “benefit security” and ensure “intergenerational equity.”

Social Security and Medicare, on the other hand, have repeatedly levied increasing tax burdens on succeeding generations of Americans and have accumulated trillions of dollars in unfunded obligations, which are summarized in the Treasury report.

Adjusted for inflation, the maximum Social Security payroll tax per person is now 8.7 times higher than Congress promised at the outset of the program. Likewise, when President Lyndon B. Johnson pitched the Medicare program in 1964, he said that it would cost “no more than $1 a month” in taxes per worker. Adjusted for inflation, $1 in 1964 equals $8 today, but workers earning $50,000/year now pay $121/month for this tax, while those earning $100,000 pay $242/month, and those earning $1 million pay $3,017/month—or 375 times what Johnson claimed. Furthermore, this tax only funds Medicare hospital insurance, which accounts for 37% of Medicare spending. Other Medicare benefits like physician services, lab tests, and prescription drugs are funded by other taxes.

Social Security and Medicare differ from true pensions, because taxpayers don’t have a contractual right to receive these benefits. In the original Social Security Act of 1935, Congress “reserved” the “right to alter, amend, or repeal any provision of this Act.” Consequently, the Supreme Court ruled in 1960 that Congress can change Social Security benefits at will. Nevertheless, paying these benefits is an implied commitment of the federal government, and federal law requires that these programs be included in the Treasury report.

Federal actuaries measure the unfunded obligations of Social Security and Medicare in several different ways, but only one of them approximates accrual accounting. This is called the “closed-group” unfunded obligation, which is the money needed to cover the shortfalls for all current taxpayers and beneficiaries in these programs. In the words of Harvard Law School professor and federal budget specialist Howell E. Jackson, the closed-group measure “reflects the financial burden or liability being passed on to future generations.” These burdens are $30.8 trillion for Social Security and $34.6 trillion for Medicare. To place these figures in context:

  • Social Security’s unfunded obligations amount to an additional $180,000 from every person who currently pays Social Security payroll taxes.
  • Medicare’s unfunded obligations amount to an additional $133,000 from every U.S. resident aged 15 or older.

The shortfalls above include the federal government paying back with interest all of the money it has borrowed from Social Security and Medicare. Yet, a scientific poll commissioned by Just Facts in 2017 found that 80% of voters believe “Social Security’s financial problems stem from politicians looting the program.” That notion is the exact opposite of the truth, as hard facts prove that:

  • The original Social Security Act of 1935 required the program to loan all of its surpluses to the federal government, and this has never changed.
  • The federal government is legally bound to pay back all of this money with interest, and it has repeatedly done so throughout the program’s history.
  • Since 2010, Social Security has been using interest received from the federal government to cover the shortfalls between its expenses and non-interest income.
  • The Social Security Trustees’ best estimate is that all of the borrowed money and interest will be paid back by 2034, or 16 years from now.
  • In 16 years, the Social Security program will become insolvent and unable to pay full benefits unless major changes are made, like raising payroll taxes by 29% or cutting benefits by 22%.

Beyond federal employee retirement benefits and Social Security and Medicare shortfalls, the Treasury details other obligations of the federal government, like environmental liabilities and accounts payable. The report also measures federal assets, such as cash, real estate, and corporate stocks. This excludes federal stewardship land and heritage assets, such as national parks and the original copy of the Declaration of Independence. While these items have tangible value, the report explains that the government “does not expect to use these assets to meet its obligations.”

Tallying the Treasury’s data on government assets, debts, liabilities, and obligations yields a fiscal shortfall of $88.9 trillion. Divided evenly across all U.S. households, this amounts to an average of $704,000 per household.

Government Assumptions

The federal government’s financial condition may be significantly worse than the figures above indicate. This is because the Treasury data is based on federal agency assumptions that are uncertain and optimistic. For example:

  • A paper in the journal Demography found that the Social Security Administration is using an antiquated method to project life expectancies, and as a result, the program “may be in a considerably more precarious position than officially thought.”
  • When the federal government makes student loans, it projects that it will eventually reap a 9% average profit from interest on the loans. However, the Congressional Budget Office has determined that if the federal government accounted for the market risk of these loans, it would show an average loss of 12% on every dollar it lends.
  • The Board of Medicare Trustees has stated that the program’s long-term costs may be “substantially higher” than projected under current law. This is because the Affordable Care Act (i.e., Obamacare) will cut Medicare prices for “many” healthcare services to “less than half of their level” under prior law. The Trustees explain that this may cause “withdrawal of providers from the Medicare market” and “severe problems with beneficiary access to care.” This would pressure lawmakers to raise prices and thus increase the costs of Medicare.

Harmful Effects

The national debt is currently $20.9 trillion, or 106% of the nation’s gross domestic product. This is very high compared to the rest of U.S. history except for at the height of World War II. The national debt, however, is mainly measured on a cash basis, and as such, it does not include most of the obligations detailed above.

These obligations are looming, and this shows in Congressional Budget Office projections of publicly held debt, which is a partial measure of the national debt often cited by federal agencies and media outlets. In 2014, CBO projected that this debt would grow over the next two decades to unprecedented levels unless the government changes its policies. Nearly four years later, the actual outcomes are slightly worse:

As a portion of the nation’s economy, federal taxes and spending rose steeply between 1930 and World War II. Since then, taxes have risen slightly, but spending has risen more.

The vast bulk of current and impending federal debt is due to increased spending on social programs like Medicare, Social Security, Medicaid, and food stamps. Such programs have grown from 21% of all federal spending in 1960 to 63% in 2016. Under current laws and policies, the Congressional Budget Office projects that almost all future growth in spending will be due to these programs and interest on the national debt.

It is often impossible to objectively isolate the effects of a single factor (like the national debt) on an economy. However, a broad range of evidence indicates that excessive government debt can cause far-reaching negative outcomes, such as lower wages, weak economic growth, increased inflation, higher taxes, reduced government benefits, or combinations of such results.

The Government Accountability Office has warned that “the costs of federal borrowing will be borne by tomorrow’s workers and taxpayers,” which “may reduce or slow the growth of the living standards of future generations.” This may have already begun. The national debt has risen dramatically over the past decade, and with this, the U.S. has experienced historically poor growth in gross domestic product, productivity, and household income.

  • March 8, 2018 at 10:31 AM

    I have recently reviewed the government’s 2017 budget and found dozens of very expensive items that should never be funded with deficit spending.

  • March 11, 2018 at 1:15 AM

    Why are these apparently fatal amounts for the country’s future not brought up for discussion on the popular or high viewership media?

    At the levels of debt and projected debt you noted could the problem still be solved or are we just waiting for the end of our country’s economy?

  • March 12, 2018 at 11:37 PM

    Great work – solid data and analysis. We can split an atom, clone animals, send a spacecraft beyond our solar system, and build a computer that can do over 33,500 trillion calculations per second yet our government can’t or won’t produce and widely publish reliable numbers or properly manage our country finances.

    Thank you Just Facts for giving us just facts!


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