All Of The Government's Important Economic Data Are Fraudulent -- Part III (Social Security and Medicare)

Between and among the big three pieces of government economic data under consideration here (GDP, the poverty rate, and the accounting for retiree pension and health care obligations) it's hard to know which one is the most fraudulent.  But if the criteria are the very size of the fraudulent mis-statement of numbers and the degree to which the truth is hidden so as to be near impossible to figure out, the accounting for pension and health care obligations has a good claim to be the worst of all.

The accounting for pension and health care obligations is part of the government's income statement, most often cited in the context of the annual deficit.  Almost everyone is familiar with the regularly-cited deficit numbers, which in the recent Obama years have been running at something over $1 trillion per year.  Is that a number we can trust?

The answer is, of course not.  If you give just the most superficial look to the government's accounting that produces this number, you know that it is nearly pure cash in cash out accounting.  That means that the "deficit" for say 2012 is the difference between the government's cash receipts in 2012 and its cash expenditures in 2012.  The accounting was put in place back in the nineteenth century, when the main businesses of the government were things like the army, the state department, the justice department and the courts.  Pure cash accounting made a good deal of sense for those kinds of activities.  Then, starting in the 1930s and accelerating ever since, the government changed its businesses until today its main lines of business are Social Security, Medicare and Medicaid.  In other words, today the government is mainly a gigantic provider of annuities and health care, mostly for retirees.  Is pure cash in cash out accounting in any way appropriate for such an enterprise?  Not even remotely close.

What we now have is entirely like a life insurance company selling policies to 20 and 30-somethings, finding that no policyholder dies in the year, declaring all of the premium money to be "income" and paying it all out to the shareholders as a dividend, and not even making a record of how much are the obligations being accumulated that will have to be paid out when the policyholders get old and die.  Of course, any executives of a private insurance company that tried this would promptly go to jail.  There is an entire industry of accountants and actuaries that exists for insurance companies to make reasonable calculations of the future obligations being incurred so that they can be provided for over time.   The key difference between what the private companies do and what the government does is the calculating of accruals for the prospective and inevitable liabilities.

As for the government, it's not just that they report their numbers in a completely inappropriate way, but in all the vast amount of information that they put out, you cannot find any mention of an appropriate accrual for the insurance-like liabilities.  Private citizens do not have all the data needed for the calculations, and can only make rough approximations.  But it is clear that the numbers are huge.  In an op-ed in the Wall Street Journal last November 26, Chris Cox (former Chairman of the SEC) and Bill Archer (former Chairman of the House Ways and Means Committee) estimated that an appropriate annual accrual just for the two largest government insurance programs, Social Security and Medicare, would be $7 trillion per year.  They didn't say what assumptions went into that number or who produced it for them.

But if the number is even in the right range, then the real deficit is not the +/- $1 trillion reported by the government, but more like $8 trillion.  Do you think that can be fixed by higher taxes?  Just for comparison's sake, the total amount of Adjusted Gross Income reported on all tax returns to the IRS in 2010 (most recent year available from the Tax Foundation) is $8.040 trillion.  Not much left there to live on.

Now that's a pretty major fraud!  Do you hear anyone talking about it?