The 2012 annual report for the federal government continues to use dubious accounting standards to conceal the cost of government retirement promises. But its disclosures have improved somewhat, and should be read closely.
One example is the cost, in today's dollars, to make Social Security and Medicare solvent for the next 75 years. This grew to $38.6 trillion, an increase of $4.7 trillion over the prior year. According to the report, Americans' aging drove $1.6 trillion of the increase; the rest mostly reflected poorer-than-expected economic growth.
The Government Accountability Office noted that "the economic recovery has been slower than was assumed" and pointed to a reduction in hours worked by average Americans and an increase in the number of disabled Americans. These trends mean less revenue for Social Security and Medicare from future payroll taxes, so we will need an additional $3.1 trillion in today's dollars to pay for the programs.
This is not surprising. Real gross domestic product grew at just 1.6 percent annually from 2001 to 2011, and the Treasury assumes a future growth rate of 2.1 percent. But the average annual growth rate from 1951 through 2001 was 3.4 percent. Every year of slow growth decreases the amount brought in from payroll taxes. This hits younger Americans twice, with a smaller economy and higher personal income tax rates to pay for baby-boomer retirements.
Absent from our debate about cutting entitlements and raising taxes on the wealthy is the question of how to raise the economy's growth rate. Without the 3 percent growth that the U.S. economy has historically delivered, the promises we have made ourselves will be even more unaffordable. Why aren't we focused on boosting growth?
Another example of improved disclosure: The report keeps the "trust fund perspective" accounting used for years to claim falsely that Social Security and Medicare are solvent. But it adds a "government perspective" that calculates the shortfall facing the government as a whole. Rather than talk about phantom trust funds, Treasury says that if taxes rose and/or spending fell by 2.7 percent of GDP, for each of the next 75 years, the government's public debt would stabilize at the 2012 level of 73 percent of GDP.
This highlights the continuing disagreement between Treasury and some Medicare trustees, who have again refused to accept Treasury's assumption that the Affordable Care Act will slow the growth in health care costs.
The ACA is primarily an expansion of insurance coverage, but it included several pilot programs designed to reduce costs. But Medicare trustees say that they are likely to fail and point to Congress's continued overrides of its own cost controls (such as the repeated Medicare "doc fix" on payments). A recent example is language slipped into the American Taxpayer Relief Act that will delay price restraints on a pill, sold by the biotech company Amgen, that will cost Medicare $500 million.
