The coming fiscal canyon

This fiscal cliff is nothing compared to the impending doom on the horizon.............

The greatest fiscal challenge to the U.S. government is not just its annual deficit but its total liabilities. Our federal balance sheet does not include the unfunded social insurance obligations of Medicare, Social Security, and the future retirement benefits of federal employees. Only in the small print of the financial statements do you get some idea of the enormous size of the unfunded commitments. Today the estimated unfunded total is more than $87 trillion, or 550 percent of our GDP. And the debt per household is more than 10 times the median family income.

The public doesn't know about these awesome liabilities because the totals appear only in actuarial estimates. As Chris Cox, former chairman of the Securities and Exchange Commission, and Bill Archer, former chairman of the House Ways and Means Committee, recently noted in the Wall Street Journal, the real annual accrued expense of Medicare and Social Security alone is $7 trillion. The government's balance sheet does not include any of these unfunded obligations but focuses on the current year deficits and the accumulated national debt. Cox and Archer reported that the annual budget deficit is only about one fifth of the more accurate figure.

If the American public saw our financial statements in the same way that public companies report their pension liabilities, it would clearly see the magnitude of danger represented by the future borrowings that these liabilities to an aging population imply—borrowing on a scale that would not only bankrupt the programs themselves but the entire federal government. And to a worrying extent, we are locked into continued escalation by the fact that social insurance programs, as well as other mandatory programs, carry payments that are in accordance with automatic formulas written into law and are not subject to an annual spending limit. Today, less than 40 percent of our budget is actually decided by Congress and the president, down from 62 percent 40 years ago.

If we continue in these irresponsible ways, an eventual reckoning cannot be avoided. The liabilities are so huge, and multiplying so fast, that there will be one unavoidable demand as the various bills come to their due date. Show us the money!

How will the bills be honored? Let's remember that 100 percent of the payroll taxes for Social Security and Medicare are spent in the year that they are collected, leaving no leftovers for the unfunded obligations. And this doesn't take into account other risks, hardly minimal, like the fact that the Federal Housing Authority confronts a $16.3 billion net deficit after its latest audit that may force a taxpayer bailout for the first time in its 78-year history. And just four years from now, in 2016, the Disability Insurance trust fund will be fully depleted.

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