>Don’t read that budget!

>Don’t read the President’s budget if you want an accurate picture of the nation’s finances, read this:

GAO Site with the FY 2007 Financial Statements

These are what the statements for the US government would look like if it were a real company, and had to produce auditable statements in accordance with the Generally Accepted Accounting Principles (GAAP).

They’re not pretty. Take a look especially at the link to “The Nation by the Numbers” and scroll down to the “Social Insurance Exposures”. That’s what an accountant would say the US is on the hook for in terms of promised benefits, either to those currently eligible for benefits ($45,000,000,000,000) or to those currently eligible and those expected to be eligible by the end of the term (75 years) – $40,000,000,000,000. Yes, those are trillions. That’s the amount we would have to have in the bank today to pay everything that’s promised under the current rules, even after you include the taxes we’ll collect in the future.

45. Trillion. Dollars.

If you’re not familiar with “accrual basis” or “present value”, let me break it down for you.

Accrual basis means that you count the money as spent when you become obligated to spend it. So, let’s say you buy some beers on a tab at a bar. Under a cash basis (like the President’s Budget), you haven’t spent anything yet, because no money has changed hands. But under an accrual basis (which most accountants use for large companies), you’ve spent money because in the future you’ll have to pay up. In accounting terms, you have an “account payable” and the bar has an “account receivable”. So under these financial statements, we count the Social Security benefits that are expected to be paid based on the wages people earned this year, as an expense for this year.

Present Value: Ok, so we have all these expenses, but they’re happening years, even decades in the future. How on earth can we tell how much those payments are worth in the future? The “Present Value” is what a payment or a stream of payments is worth today, if you were to invest at a prevailing interest rate enough to pay those obligations.

For example, let’s say that I owe you $100 a year from now, and that I can get 10% on a standard investment. The present value of that $100 loan is $90.90, because I can invest the $90.90 and have $100 a year from now to pay you off.

For a constant stream of payments, there are more complicated formulas as well as tables that let you convert, as well as online calculators.

So now it should be clear that when the Government says that the present value of all those entitlement obligations on an accrual basis is NEGATIVE FORTY-FIVE TRILLION DOLLARS, that should get someone’s attention.

We’ll see.


About perkinsms

I'm an engineer and father interested in transit, parking and economics.
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