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America's hidden America's hidden debt bombsdebt bombs

America's hidden America's hidden debt bombsdebt bombs

America's total debt load is on pace America's total debt load is on pace to top $13 trillion this year, and $22 to top $13 trillion this year, and $22 trillion by 2020 -- and that's just the trillion by 2020 -- and that's just the debt we're counting. debt we're counting.

What's not being counted: What's not being counted:

Potential debt bombs that don't get Potential debt bombs that don't get factored into most budget analysis. factored into most budget analysis.

America's hidden America's hidden debt bombsdebt bombs

When anyone talks about U.S. debt, When anyone talks about U.S. debt, they typically refer to two numbers.they typically refer to two numbers.

The first is the debt held by the The first is the debt held by the publicpublic.. That's money owed to those That's money owed to those who have bought U.S. Treasuries, who have bought U.S. Treasuries, most notably big bond mutual funds most notably big bond mutual funds and foreign governments. and foreign governments.

Debt held by the public today is Debt held by the public today is roughly $8 trillion and rising. (March roughly $8 trillion and rising. (March 1, 2010)1, 2010)

America's hidden America's hidden debt bombsdebt bombs

The second number is the money The second number is the money the federal government owes to the federal government owes to government trust funds, such as government trust funds, such as those for Medicare and Social those for Medicare and Social Security. Security. The government has used revenue The government has used revenue collected for those programs to cover collected for those programs to cover other outlays. Currently, the debt to other outlays. Currently, the debt to the trust funds is approaching $5 the trust funds is approaching $5 trillion. trillion. The two combined is the total gross The two combined is the total gross debt that's accounted for. But deficit debt that's accounted for. But deficit hawks also worry about what's hawks also worry about what's notnot on on the books.the books.

Losses from Fannie Losses from Fannie Mae and Freddie MacMae and Freddie MacFannie Mae and Freddie Mac are Fannie Mae and Freddie Mac are private companies that for years had private companies that for years had the implicit backing of the federal the implicit backing of the federal government government

That backing assured investors that That backing assured investors that if anything went seriously south for if anything went seriously south for the companies Uncle Sam likely -- the companies Uncle Sam likely -- although not absolutely -- would step although not absolutely -- would step in. in.

Well, things did go south, and now Well, things did go south, and now both are run by the federal both are run by the federal government .government .

Losses from Fannie Losses from Fannie Mae and Freddie MacMae and Freddie MacIt's still not clear what the It's still not clear what the companies' total hit to the federal companies' total hit to the federal budget will be. budget will be.

It is estimated that the total loss on It is estimated that the total loss on the mortgages backed by the the mortgages backed by the companies could reach $448 billion, companies could reach $448 billion, with a portion of that covered by with a portion of that covered by reserves or assumed by outside reserves or assumed by outside parties. parties.

The CBO estimated the net costs to The CBO estimated the net costs to the government could top $370 billion the government could top $370 billion by 2020. by 2020.

Losses from Fannie Losses from Fannie Mae and Freddie MacMae and Freddie MacThese are just estimates. But what's clear These are just estimates. But what's clear is that Fannie and Freddie are not cheap is that Fannie and Freddie are not cheap dependents. dependents.

"Their costs are largely unmeasured, "Their costs are largely unmeasured, unrecognized in the budget and unrecognized in the budget and unmanaged," . unmanaged," .

"A troubling aspect of current policy "A troubling aspect of current policy aimed at restarting the financial markets is aimed at restarting the financial markets is the likely expansion of implied guarantees the likely expansion of implied guarantees to include the obligations of additional to include the obligations of additional private financial institutions." private financial institutions."

Unfunded promisesUnfunded promises

The governments' accrued debt to The governments' accrued debt to the Social Security and Medicare trust the Social Security and Medicare trust funds is known. And making those funds is known. And making those payments -- which begin in earnest payments -- which begin in earnest this decade --won't be easy given the this decade --won't be easy given the drop in federal revenue and the surge drop in federal revenue and the surge in government spending.in government spending.

"[Lawmakers] need to acknowledge "[Lawmakers] need to acknowledge they have no way of funding them they have no way of funding them right now," said tax expert Len right now," said tax expert Len Burman Burman

Unfunded promisesUnfunded promisesThe piece of future entitlement debt The piece of future entitlement debt that's not reflected under current that's not reflected under current budget protocols is what the budget protocols is what the government will have to pay into the government will have to pay into the system system afterafter its payments to the trust its payments to the trust funds end -- which will happen by funds end -- which will happen by 2037 for Social Security and within 2037 for Social Security and within the next decade for Medicare. the next decade for Medicare. At that point, the programs will only At that point, the programs will only be collecting enough in taxes to pay a be collecting enough in taxes to pay a portion of the benefits currently portion of the benefits currently promised. There will be enormous promised. There will be enormous pressure on the government to make pressure on the government to make up the difference, and Uncle Sam up the difference, and Uncle Sam would have to borrow a lot of money would have to borrow a lot of money to do so. to do so.

True cost of tax True cost of tax breaksbreaks

Everybody loves tax breaks. And Everybody loves tax breaks. And there's more than a trillion dollars of there's more than a trillion dollars of them to love.. them to love..

That's the amount of money the That's the amount of money the Treasury foregoes in annual revenue Treasury foregoes in annual revenue as a result of the many breaks in the as a result of the many breaks in the tax code. And that effectively tax code. And that effectively increases the government's need to increases the government's need to borrow.borrow.

But that trillion-plus isn't really up for But that trillion-plus isn't really up for consideration during annual budget consideration during annual budget discussions. "Tax expenditures are discussions. "Tax expenditures are basically hidden," basically hidden,"

True cost of tax True cost of tax breaksbreaks

No one advocates abolishing tax No one advocates abolishing tax breaks altogether .breaks altogether .

But tax expert Len Burman and But tax expert Len Burman and others believe tax breaks should be others believe tax breaks should be treated as discretionary spending. The treated as discretionary spending. The idea is to bring them into the open so idea is to bring them into the open so lawmakers can make a conscious lawmakers can make a conscious decision annually about what they decision annually about what they spend on tax breaks and recognize spend on tax breaks and recognize the costs associated with that the costs associated with that decision. decision.

Long-term costs of new Long-term costs of new rulesrules

This year is the first year in which This year is the first year in which high-income investors with traditional high-income investors with traditional IRAs or 401(k)s -- both of which let IRAs or 401(k)s -- both of which let savings grow tax-deferred until savings grow tax-deferred until withdrawn -- will have a chance to withdrawn -- will have a chance to convert their accounts into Roth IRAs, convert their accounts into Roth IRAs, where investments grow tax-free.where investments grow tax-free.The new conversion rule is scored as The new conversion rule is scored as a revenue raiser on the federal a revenue raiser on the federal budget over the next decade budget over the next decade because those who convert must pay because those who convert must pay the tax owed on their traditional IRA the tax owed on their traditional IRA savings the year they convert.savings the year they convert.

Long-term costs of new Long-term costs of new rulesrules

But long-term it's a different story. But long-term it's a different story. Since investments in the converted Since investments in the converted accounts will grow tax-free, Uncle Sam accounts will grow tax-free, Uncle Sam will collect less revenue than he will collect less revenue than he otherwise might have had the otherwise might have had the investors kept their ever-larger investors kept their ever-larger savings in a traditional IRA and paid savings in a traditional IRA and paid taxes on them in retirement.taxes on them in retirement.

"It will cost federal coffers a lot "It will cost federal coffers a lot beyond the 10-year window," Burman beyond the 10-year window," Burman said said

Curbing debtCurbing debt At stake ultimately is the United At stake ultimately is the United States' status as a first-class States' status as a first-class economy. economy. It's going to take bold strokes to deal It's going to take bold strokes to deal with this challenge. It's going to take with this challenge. It's going to take big ideas, and it's going to take big ideas, and it's going to take political courage because it's every political courage because it's every hot-button issue that's out there. hot-button issue that's out there. It is Social Security. It is Medicare. It It is Social Security. It is Medicare. It is revenue. All of them," said Senate is revenue. All of them," said Senate Budget Chairman Kent Conrad, D-Budget Chairman Kent Conrad, D-N.D., at a hearing on fiscal N.D., at a hearing on fiscal sustainability. sustainability.

Curbing debtCurbing debt The president's yet-to-be formed The president's yet-to-be formed bipartisan fiscal commission will be asked bipartisan fiscal commission will be asked to propose ways to hit two key targets to propose ways to hit two key targets

to get annual deficits to 3% of gross to get annual deficits to 3% of gross domestic product by 2015 domestic product by 2015

to then stabilize the nation's total accrued to then stabilize the nation's total accrued debt at something far lower than 77% of debt at something far lower than 77% of GDP, which is where it would be by 2020 GDP, which is where it would be by 2020 under President Obama's proposed 2011 under President Obama's proposed 2011 budget. budget.

Curbing debtCurbing debt As things stand today, federal spending -- As things stand today, federal spending -- much of it in Medicare and to a lesser much of it in Medicare and to a lesser degree Social Security -- is on track to grow degree Social Security -- is on track to grow much faster than the economy for decades.much faster than the economy for decades.

To achieve better fiscal balance after the To achieve better fiscal balance after the economy recovers means that lawmakers economy recovers means that lawmakers will have to agree to measures that run will have to agree to measures that run contrary to the ideologies of the left and contrary to the ideologies of the left and the right: Cut spending and raise taxes.the right: Cut spending and raise taxes.

Raise the Social Raise the Social Security retirement ageSecurity retirement age

As things stand today, federal spending -- As things stand today, federal spending -- much of it in Medicare and to a lesser much of it in Medicare and to a lesser degree Social Security -- is on track to degree Social Security -- is on track to grow much faster than the economy for grow much faster than the economy for decades.decades.

Currently, the full retirement age is set to Currently, the full retirement age is set to hit 67 in 2027. Moving up that timetable, hit 67 in 2027. Moving up that timetable, and then adjusting the retirement age by and then adjusting the retirement age by just 1 month every 2 years after that, just 1 month every 2 years after that, could take care of nearly a third of the could take care of nearly a third of the long-term shortfall in Social Security. long-term shortfall in Social Security.

Raise the Social Raise the Social Security retirement ageSecurity retirement age "As life expectancy increases, we just "As life expectancy increases, we just can't afford to support people in retirement can't afford to support people in retirement for as long as we have currently under for as long as we have currently under these programs .these programs .

To protect lower income seniors who To protect lower income seniors who depend most heavily on their Social depend most heavily on their Social Security benefits, one option would be to Security benefits, one option would be to slow the growth of initial benefits for slow the growth of initial benefits for higher income people. higher income people.

In terms of Medicare, MacGuineas said, In terms of Medicare, MacGuineas said, one option is to ask higher income retirees one option is to ask higher income retirees who can afford it to contribute more to the who can afford it to contribute more to the cost of their benefits.cost of their benefits.

Reduce health Reduce health insurance tax breaksinsurance tax breaks

Everyone agrees controlling health costs Everyone agrees controlling health costs is one of the biggest steps needed to is one of the biggest steps needed to reduce the growth in U.S. debt over time. reduce the growth in U.S. debt over time.

One of the most effective ways to do so is One of the most effective ways to do so is to reduce or eliminate the tax breaks to reduce or eliminate the tax breaks workers get when they buy their insurance workers get when they buy their insurance at work at work

Currently, the portion of premiums paid Currently, the portion of premiums paid by employers is treated as tax-free by employers is treated as tax-free compensation to workers, and there is no compensation to workers, and there is no limit on how much employers may limit on how much employers may contribute. contribute.

Reduce health Reduce health insurance tax breaksinsurance tax breaks

The cost in forgone revenue over 10 The cost in forgone revenue over 10 years is $2.5 trillion, Conrad said. years is $2.5 trillion, Conrad said.

A cap would mean workers would A cap would mean workers would pay income tax on the portion of their pay income tax on the portion of their employer's contribution above the employer's contribution above the cap.cap.

The theory is that workers would The theory is that workers would avoid paying income tax by choosing avoid paying income tax by choosing lower-cost plans over time. lower-cost plans over time.

Broaden the tax base Broaden the tax base Close to half of tax filers will end up with Close to half of tax filers will end up with no net federal income tax liability for 2009 no net federal income tax liability for 2009 thanks in large part to a complex host of thanks in large part to a complex host of credits, exemptions, deductions and credits, exemptions, deductions and exclusions. Those tax breaks reduce federal exclusions. Those tax breaks reduce federal revenue intake by roughly $1 trillion a year. revenue intake by roughly $1 trillion a year. . .

If we can get rid of a lot of tax If we can get rid of a lot of tax expenditures, we can lower [marginal tax] expenditures, we can lower [marginal tax] rates actually below today's level and still rates actually below today's level and still raise additional revenues," said Rudolph raise additional revenues," said Rudolph Penner, a former CBO director who is now Penner, a former CBO director who is now the co-chair of the Committee on the Fiscal the co-chair of the Committee on the Fiscal Future of the United States. income tax by Future of the United States. income tax by choosing lower-cost plans over time. choosing lower-cost plans over time.

Consider new revenue Consider new revenue options options

Generating more income tax Generating more income tax revenue can be helpful, but raising revenue can be helpful, but raising taxestaxes too high can dampen economic too high can dampen economic growth. So lawmakers will be looking growth. So lawmakers will be looking for other sources of revenue on top of for other sources of revenue on top of income taxes. income taxes.

Among the ideas being considered is Among the ideas being considered is a national sales tax known as the a national sales tax known as the value-added tax or a possible energy value-added tax or a possible energy tax tax

CREDITSCREDITS

Jeanne Sahadi, senior writer February 15, Jeanne Sahadi, senior writer February 15, 2010: 2010: