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Real Federal Deficits Increase Faster Than the Official Amount

June 8th, 2012 by Associate

The Congressional Budget Office currently projects a budget deficit of $1.3 trillion in 2012.  To put it into perspective, that’s an average of around $4,200 for every man, woman and child in the U.S.  If we just include the working age population (individuals between the ages of 18-64) the borrowing increases to $6,700 per person and over $11,000 per U.S. household.  This is just the official projected deficit for one year.  The “real” deficit looms even larger.

USA Today analysts took a closer look at the 2012 projected deficit and their findings are alarming due to how the federal government accounts for their spending.  The federal government is exempt from recognizing promised retirement benefits which means future Social Security and Medicare benefits are excluded from the 2012 budget deficit.  The justification for excluding these future liabilities is that Congress can always alter the benefit structure or increase taxes to cover the shortfall.

However, I’m not convinced that federal government has leeway in this matter.  Reforms to reduce the benefits of Social Security and Medicare programs have historically been met with opposition from voters who have long been counting on receiving their promised benefits.  On the revenue side, increasing taxes in the current economic environment is also an unlikely scenario.  Compounding the issue, tax cuts have been proposed and sometimes signed into law to stimulate the economy.  One in particular, the 2% payroll tax cut, translates to a reduction of over 15% of Social Security Administration’s revenue stream.  So, with the current benefit structure, just how bad is the “real” federal deficit?

According to the USA Today study, government actuaries estimated the underfunded future liability accrued for Social Security and Medicare was $3.7 trillion in 2011 alone.  Assuming a similar number for 2012 we are facing a real budget deficit of $5 trillion which equates to almost $26,000 per working age individuals and well over $40,000 per U.S household.  Median household income was only $49,445 according to the 2010 census report.

Something will have to give, either a change to the benefit structure, an increase in taxes, or a combination of both.  Meanwhile, the next time you hear the federal budget deficit is X dollars, keep in mind that it doesn’t include unfunded liabilities.

* Thank you to Micheal Hock, Tax Staff, for his contributions to this post.

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