Re: The actual US defict....... (into the trillions last year, entirely fatal, US GAO)
- From: Lysander <lysander@xxxxxxxxxxx>
- Date: Tue, 1 Jan 2008 15:27:50 -0800 (PST)
On Dec 29 2007, 3:02 am, RogerDodger <n...@xxxxxxxxxxxx> wrote:
On Sun, 23 Dec 2007 15:56:04 -0800 (PST), Lysander
<lysan...@xxxxxxxxxxx> wrote:
On Dec 23, 12:47 pm, phil scott <p...@xxxxxxxxxxxxx> wrote:
"... not the $163 billion reported in the press, but $2.386 trillion,
with a "t". More than 14x more.
The cash in today is counted in income. The offsetting liability isn't
recognized as an expense.
This is the problem with accuracy in accrual for the government. What
is the liability? I am a very well trained economist and I can tell
you that I could not give you a number I would feel comfortable with.
The problem is this is that things like social security, welfare, and
medicare are not like pensions in corporations. The government buys
the medical care not just insurance where you may and I stress may be
able to find a trend stationary series on the price of medical
insurance. Social security and welfare are heavily tied to inflation.
Welfare is tied to the business cycle. I have no way of even beginning
to give you an accurate projection of welfare benefits 10 years from
now. Essentially the TANF accrued a liability from now into an
infinite time horizon. Welfare before that did as well. Social
Security is a little easier because it works more like a pension plan
and accounting could be similar to what corportations use on pensions.
However, there is a big problem in that since Reagan SS has had COLAs.
IRRC, Inflation is a unit root process. Without a stationary trend you
can't predict how inflation will rise. So even if you treat it like a
pension, the liability is still unknown. Lowering inflation rates,
like the 90's under Greenspan, will cause that liability to grow at
slower rate. If we see 70's inflation that liability skyrockets. The
liability is too closely tied to inflation that is very unpredictable
over a long term to be estimated.
I respect Greenspan but I also know he is an economist and not an
accountant. I just do not trust the numbers on SS or what liabilities
that are tied to inflation and stretch over an infinite horizon might
be.
The CEO then gives himself a bonus for the
record profits he just generated. Besides being materially misleading
of itself, the incentive effects are, well, bad.
I think any bunk accrual number you put for SS, medicare, or TANF
would be worse than cash.
Not just for CEOs, but for politicians as well. Which is why
governments other than the federal government now are generally being
required to use their own version of accrual basis GAAP reporting.
(They hate it, and are being dragged kicking and screaming towards
recognizing their pension and health plan retirement liabilities to
their employees.
The problem with pensions and health plans they do not like is now
having to report if the pension plan is over or under funded. This
makes a huge change in liabilities and has made some recorded profits
crash. It is not recognizing the liability that is really the problem
it is the report of the liability versus the funding of the pension
plan that is the problem. If the plan is properly funded or over
funded it is not a problem.
Politicians do like to be able to recognize cash
received today from health plan contributions as budget-boosting
income they can spend, without recognizing the years of liabilities
for health plan costs that come attached to it, which will materialize
as cash obligations only long after they have moved on, on some other
guy's watch .)
Maybe but do you seriously believe we can put accurate numbers on how
much money will paid out in SS, medicare, and TANF over the next 50
years? That means predicting inflation properly for 50 years,
predicting all the business cycles over the next 50 years, and
predicting health care expenditures for 50 years. Von Hayek's
acceptance speech for his noble prize is excellent in explaining why
simple math like accountants use falls apart in predicting long term
complex issues. These are not the more simple liabilities of pensions
or medical insurance costs. These are liabilities with a lot of
variables that are very hard to predict. Unfortunately, many of the
series that would are necessary to give good predictions are random
walk series. Meaning the time series can not predict a trend.
Ah, well using projections that are essentially accrual methods, the
one-year federal deficit for 2007 was, oh, totalling up the numbers,
looks like $2.66 trillion, yes with a "t".
Bunk projections give bunk numbers. Ironically, matching in accounting
can cause the company to have huge profits while cash flows is a big
negative and the company is going out of business because it can't pay
its bills. Under accrual or even cash I can purchase a billion dollars
of inventory and still make huge profits if it sits unused. I have 1
billion dollars go out and I get 10 million in and I may be accounting
have 9 million in profits. How because the inventory not used is not
expensed and not part of goods sold. I started with 1 billion in cash
I have 9 million in cash but the accounts say I made 9 million profit.
When my cash decreased by $991,000,000. Despite the big profits I am
out of business. Maybe it shows 2 billion because I have a contract
for to use the inventory but I will not receive the cash until 2 years
from now. I still can't pay my bills but the accounts say I am making
huge profits because I have earned money and accrued the cost. All the
ARs in the world won't pay the bills if the cash isn't there.
It's tricky using accrual accounting for the federal gov't, because
the only liabilities that are recognized using accrual accounting are
legally enforceable ones -- and the federal government can't be
legally forced to do much, since Congress can always change the law to
not do what it doesn't want to. That's always been the rationale for
not applying accrual accounting to the federal gov't.
Most entitlements are linked to to many variables to accurate estimate
the liability. If Greenspan estimated what it would be under accrual
he had to assume a certain inflation rate and make assumptions about
the business which may be very wrong.
However, workers who pay Social Security and Medicare taxes certainly
believe they've accrued the benefits that the benefit formulas promise
them as attaching to the taxes they've paid, even though the federal
gov't includes only the tax receipts in income, without recognizing
the offsetting liability for their future benefits on its books (even
in its own version of accrual accounting).
They are not only attached to how much you have paid but inflation as
well. Most pension plans don't do this. It pays you $X per period if
inflation means $X can't buy a pack of chewing gum too bad. Many
people saw their pensions go to worthless status in the high inflation
of the 1970's.
That counts for most of the $2.6 trillion. But there are also military
and federal civilian retirement obligations, and a lot of other
similar things in there.
Which is why I am not sure if this really accrual differences in the
accounting sense. Greenspan was much too good of an economist to
believe they could put SS or even TANF on GAAP accrual. However, Reich
did raid the retirement funds to make the budget "balance".
Enron never commited a material misrepresentation anywhere near as big
and brazen as the federal govt's receiving SS tax receipts and
including them in income today, while not recognizing expected decades
of future benefit liabilities to the tune of $ 4 trillion, present
value -- because technically they have not been finally "earned",
since the gov't can always change the law to reduce them.
How do you get the 4 trillion number. What assumptions are made about
inflation? What interest rate is used?
In private sector accounting, similar issues of uncertainty regarding
future liabilities arise all the time. The required action is a "best
estimate", that may change year to year, sometimes by a lot, but still
it is a best estimate. The federal govt's action is to estimate $0.
The corporation projections are not for benefits that adjust to
inflation nor benefits that are paid when the economy is down.
The Medicare issues are much bigger dollar-wise. People pay Medicare
taxes that earn benefits too...
Is medicare's accounting different from ETNA or a big medical
insurance firm?
Only on a cash accounting basis.
A private business or insurance company that receives a payment from
an individual that legally requires it to in exchange pay a pension or
annuity in future years is legally required to include that accrued
liability on its books as a charge against income. The liability's
discounted present value offsets the income of the payment received on
the income statement.
This is not exactly right and how pensions are accounted for has
changed this year. I am not going to comment because I only know a
little about the changes. I do recall an intermediate accounting
professor complaining he had to photocopy the revised chapter on
pensions because the book was now all wrong. The recognition of
pensions has changed drastically just recently for corporations and in
some cases has caused severe changes in recorded profits. However, it
is not just accounting for the projected liability today and expensing
it. It is very complicated how it is accounted for. You have a lot of
stuff in addition to service cost which is what is to be paid out in
the near future. I would have to look up it to explain it and it would
take more time than I have hear to do it. Even with corporations
accounting for pensions is not as simple as you think.
Medicare of course is the monster. The Medicare trust fund is near
exhausted, so there aren't even any bonds for it counted in the
national debt. But the present value liability for it is in the tens
of trillions of dollars.
There is no medicare trust fund. Like social security all the money
has been dumped into FICA for years. The "trust fund" is government
issued bonds that have to be paid out of FICA.
Projecting the full implicit debt increases the national debt to >$50
trillion net, present value, over future projected income. (yikes!)
Garbage in. Garbage out.
Thus the $51 trillion is the amount the US gov't would need to obtain
today and save somehow (in a Swiss bank account or somewhere) to pay
its future obligations.
No the present value is the price that someone would buy the bonds
for..
No, $51 trillion is the amount the goverment would have to invest at
the bond rate today to fund its $51 trillion of net liabilities
reported by GAO.
You don't understand economics or finance here. That is the same as
what it take to buy the bonds today. If someone else could get the
money and sock it away at the interest rate used in present value they
would have the amount of the deficit in however many years the time
period is. If the present value of the debt is $51 trillion, which I
am not saying it is, then $51 trillion would be enough to buy all the
bonds back, retire the debt.
.
- Follow-Ups:
- Prev by Date: Re: Is there a subsitution effect between deposits and money market funds in the U.S.?
- Next by Date: wealth-field
- Previous by thread: Re: Is there a subsitution effect between deposits and money market funds in the U.S.?
- Next by thread: Re: The actual US defict....... (into the trillions last year, entirely fatal, US GAO)
- Index(es):
Relevant Pages
|
