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By Gary D. Halbert
July 1, 2003



1.  Report Shows Government Unfunded Liabilities Exploding.

2.  But The Report Is Based On A Timeframe That Is Ridiculous.

3.  Unfunded Liabilities May Only (Only?) Be Around $16 Trillion.

4.  Possible $12+ Trillion Tax Windfall From Retirement Accounts.


In the last few months, we have seen one new study  (however dubious) that shows the government’s unfunded liabilities, mainly Social Security and Medicare, are a staggering $44 trillion dollars, when in reality it may be only around one-third of that amount, or around $16 trillion.  Just for comparison, the national economy (GDP) is apprx. $11 trillion.  In the same time, we have seen another very technical study that shows the US government may be the beneficiary of a $12+ trillion tax windfall in the next 35-40 years as Baby Boomers retire and pay taxes on their retirement account withdrawals.

As usual, there is some misinformation in certain of these latest reports; there are some bogus assumptions being made; and of course, the issues are being spun in both directions – good and bad – depending on whose agenda they best serve.  In this E-Letter, we look at both sides of these latest revelations. 

A Dozen Trillion Here, A Dozen Trillion There…

Last month, we got to see the results of a major study commissioned last year by then Treasury Secretary Paul O’Neil regarding the “real” size of the government’s unfounded liabilities.  The startling study concluded that the “present value” of the USgovernment’s future obligations was a cool $44 Trillion in the red!  Yes, that’s $44 Trillion, with a “T.”

For a few days, the study was widely reported in the media.  Just to cite one example, the Boston Globe carried an op-ed piece regarding the eye-popping federal debt.  The op-ed authors, Laurence Kotlikoff and Jeffrey Sachs lamented about how President Bush was pushing for tax cuts even while the government was going broke, somewhat reminiscent of Nero playing his fiddle while Rome burned.  They wailed:

“Our government is going broke.  The Feds face bills that are far beyond our capacity to pay – by $44 trillion to be precise.  The longer we ignore them, the bigger they get.  Yet President Bush is working overtime to deepen our fiscal trap.”

Not to be outdone, the Financial Times of Londonran a story on May 29 th discussing the same study.   However, the FT had to up the ante a bit by saying that the White House had suppressed the report by not including it in the FY 2004 Federal Budget.  Scandalous!!    Articles started to appear on the Internet which implied that this was the reason O’Neil was fired by the Bush administration and replaced at Treasury.

The most humorous to me were the ones that blamed the entire $44 trillion shortfall on Bush’s policies – especially the most recent tax cut.   The recently enacted $350 billion tax cut, by the way, is just 0.8% of the $44 trillion shortfall predicted in the report.  The budget shortfall consists almost entirely of Medicare ($36.6 trillion) and Social Security ($7.0 trillion), plus accumulated deficits. 

(I know what you're thinking - that the current national debt of over $5 trillion does not appear to be represented in the $44 trillion shortfall.  Actually, it is.  The study projects that the remainder of the federal budget (defense and everything else the federal government does) is projected to run a surplus in the future, offsetting all but $500 billion of the existing national debt.  Again, this is based on numbers calculated out to eternity, plus some rosy assumptions, so take them for what they are worth.)

You would think that a story about a $44 trillion cover-up would be front-page news every day for months on-end.  The Democrats and liberal media would love to bludgeon Bush with such terrible news.  However, few mainstream media sources, newspapers and other sources have followed up on the story and, other than various places on the Internet, the story has almost completed faded from view. 

So, we have to ask ourselves what happened to this story, and what is the real truth behind the $44 trillion number?  Here’s the real story.

Uncovering The Cover-Up

First, let’s debunk the cover-up theory.  The purpose of the report commissioned by the Treasury Department was to help policymakers evaluate significant changes that need to be made in the Social Security and Medicare programs.  Therefore, it was not something that would be all that relevant to the 2004 budget, even though parts of the study did appear in a section of the budget and in the “Financial Report of the United States Government” issued in March.

In addition, one of the study’s authors discussed its contents at length in Congressional testimony on March 6th.  On May 9th , the supposedly suppressed report was the subject of a conference at the American Enterprise Institute, and was posted on its website.  After that came the May 19th op-ed piece in the Boston Globe.  If the Bush Administration was trying to cover the report up, they weren’t doing a very good job of it.

The final death-knell of the cover-up theory came about when the Financial Times interviewed the authors of the report and they denied that it had been suppressed.  Once these facts became known, the press lost interest and that’s why you haven’t seen it again.  However, I didn’t see op-ed pieces by the likes of Kotlikoff and Sachs setting the record straight, but maybe that’s a bit too much to hope for.

What About That $44 Trillion?

Even if we dispense with a cover-up, there’s still the matter of a report out there that says the US is $44 trillion in the hole on a present-value basis.  It turns out that this is a bogus number, at least as far as I, and many other more qualified sources, are concerned.

As mentioned above, the Treasury Department commissioned the study to help policymakers evaluate various scenarios when considering changes to Social Security and Medicare.  As you know, one of the Bush Administration’s [stated] big plans is to privatize part of Social Security and allow taxpayers to invest it themselves.

In many governmental reports, Social Security and Medicare expenditures are projected out over the next 75 years.  Just imagine how difficult it is to project all of the factors that will affect Social Security funding for 75 years.  That’s 75 years’ worth of changing inflation rates, interest rates, life expectancies, health issues, health-care costs, etc. – just to name a few.

However, when privatization was factored in, it showed to be very expensive over a 75-year time window because the full benefit of privatization would not be realized until toward the end of that period.  Therefore, the Treasury-commissioned study pushed out the timeframe for projections to ETERNITY.  Come on, who can predict 75 years, much less eternity?

The Report Turns Out to Be… A Joke, More Or Less

The report is flawed for several good reasons.  First, the accuracy of projected values 75 years into the future is questionable at best.  Projecting out in perpetuity (forever?) is simply impossible.  Next, a very small adjustment in the projected interest rates or inflation rates could produce a huge present-value effect due to the power of compounding.  A one-half percent difference in inflation or interest rates could make a difference of trillions of dollars.

Finally, the report seems to imply that, if the government had the extra $44 trillion today, it would invest it wisely for the future and not spend it on pork-barrel projects or tax cuts.  To me, this is the biggest flaw of all – assuming that politicians will act responsibly when considering the effects of their actions on future generations.  And who knows if the public would want the government running huge surpluses.  In any event, had politicians acted responsibly in the past, we wouldn’t have the problems with Social Security and Medicare that we do today. 

Most importantly, the report shows that 2/3 of the $44 trillion comes about AFTER the 75-year time window usually used for Social Security analysis.  Recent estimates peg the shortfall at the end of 75 years at only $16 trillion vs. the $44 trillion over perpetuity.

You may be thinking… $16 trillion or $44 trillion… who cares?  It still spells a financial disaster.  Actually, this is exactly what I have thought for many years.  But there is some very good news on the horizon, or at least some potentially very good news for the long-term. 

As I will discuss below, this $16 trillion shortfall may be substantially offset (or even more than offset) by an under-estimated stream of future tax revenue.

The $12+ Trillion Tax Windfall

A hot new working document is making the rounds in Washington circles and elsewhere that has politicians licking their chops!  In short, the new research study concludes that there will be a huge tax windfall of $12 trillion or more between now and 2040, resulting from taxes that will be paid on money coming out of retirement accounts during that period.

As you know, if you have money in a retirement account (IRA, 401(k), pension plan, etc., etc. – anything but a Roth IRA), you will have to pay taxes on that money whenever you take it out.  While government number-crunchers factor these retirement tax revenues into their annual budget projections, apparently no one has forecasted the effects of these tax revenues over the next 35-40 years – generally the same time as the worst of the Social Security and Medicare crisis is expected to occur.  Well, now someone has.

Hoover Institution economist, Michael Boskin, has just released a preliminary 131-page research study which estimates that the taxation of pension assets, including IRAs, 401(k)s and all other retirement plans (except the Roth IRA) will yield a $12 trillion (in today's dollars) windfall to the federal government between now and 2040.   And maybe even more.

Not surprisingly, this new study has already caused some politicians to declare that the gloom-and-doom predictions over the nation’s dangerous financial imbalance (Social Security, Medicare, etc.) have been greatly overstated for years.  And they might be correct, but the devil is in the details, as always.  You can expect to hear much more about this in the days and weeks ahead.  So, let me outline the details in advance.

The Social Security & Medicare Crisis

On Social Security, you know the issue.  The huge crunch of Baby Boomers will be retiring somewhere around 2010-2030, and this we have been told for years will bankrupt Social Security.  Social Security is called the “Third Rail” of politics – touch it and you die – and so politicians avoid Social Security reform like the plague.  

The other “Third Rail” is Medicare.  Here you know the issue as well.  We are all living longer; new medical technologies and new drugs are helping us all do that; but medical costs are going through the roof, irrespective of other trends in inflation.  No end is in sight, nor arguably should there be, when it comes to living longer.

The crisis we are continually warned about is that as the Baby Boomers retire, they will not only bankrupt Social Security, but they will also create a crisis in the health care industry and Medicare.  To hear the gloom-and-doomers talk, this will result in the greatest depression in the history of the world.  And, we’re just over a decade away before its supposed arrival.

Honestly, this is what I have believed for years.  Yet as usual, things may not be as dire as they seem.  Let’s take a fresh look at the problem, based on Boskin’s new study.

The Retirement Tax Windfall

According to the Federal Reserve, there is currently apprx. $11 trillion in the various retirement plans around America (IRAs, 401(k)s, pension plans, federal, state and local retirement funds, etc).  If Americans had to pay taxes TODAY on all the money in their retirement plans ($11 trillion), that would generate apprx. $3 trillion in tax revenues based on current tax laws.  But because these taxes will be paid over the next 35-40 years, the number will be much higher.    

In addition, we have to consider that Americans will continue to contribute more and more money to their retirement plans over the years ahead.  And we have to consider that these assets contributed to retirement plans will continue to compound and grow over the next 35-40 years and longer, even as the supposed Social Security/Medicare crisis unfolds.

The bottom line is, Boskin’s study concludes that the aggregate taxes on the nation’s retirement plans will total at least $12 trillion between now and 2040.  And it could be substantially higher depending on several variables.  If Boskin is accurate, the Social Security/Medicare crisis could be vastly overstated!


The study showing that federal unfounded liabilities are $44 trillion was ridiculous, in that it seemed to try to predict events in perpetuity, which we all know is impossible.  Boskin’s study on the federal tax revenues from retirement account assets is far more believable, as it is based on the here-and-now (known assets) and some reasonable projections (stock market trends aside) on the growth of those assets over the next 35-40 years.

For many years I have believed, and I have warned about, a major financial upheaval that would arrive in 2015-2020 or so due to the Social Security/Medicare crisis.  Not one to be a gloom-and-doomer, I have written that I would not be surprised if this coming crisis threw the US into another major depression.  Now, I am not so sure.  There may be a solution.

Boskin’s revealing study will be debated, analyzed, and sliced-and-diced by many in the weeks and months ahead.  We will hear more about it (although not by the Democrats who will view it as an advantage for Bush).  I will have more to say about it in future issues.  Yet even though his tax windfall numbers are sure to be revised (up or down), I wanted to share this information with you now, because the federal debt and Social Security/Medicare issues are something I have always been very concerned about.

This is potentially very good news, but there is also a dire warning.  I hate to even bring it up, but I have to.  If Boskin’s study becomes widely accepted, can you imagine what the politicians (all of them) could do with it?  Would it be another prescription for even more massive government deficit spending?  Could they spend all of the projected 35-40 year windfall over the next decade or so?  You bet they could!  After all, they are about to pass a $400 billion prescription drug bill which will affect not only the current deficit (est. $400 billion) and deficits far into the future.

We’ll have to see how this plays out.  I just wanted you to know about it, since it is not getting much play in the press – YET.  It will as soon as both sides figure out what it means.  Let’s hope it doesn’t result in a “blank check” for our politicians.

Wishing You A Happy Independence Day

I am so tired of the “Blame America First” gang.  In my opinion, the US is the best place to live on the face of this earth.  Sure, we have our problems on many fronts – economic, financial, moral, etc. - but name me another country that doesn’t   Sure, I am very troubled by the moral decay in our country, especially given that I have two young children (11 and 13), and I worry often about what America will look like when they are grown and have their children.

But then I have to ask myself, is there any place else I would like to raise them?  The answer is, NO.  One of my best friends moved his family from Texas to New Zealand a few years ago, and he raves about New Zealand.  But other than that possibility, there is nowhere else I would want to be besides America.

As bad as we think things are – and they are getting worse on some fronts – we should all be grateful for where we live, especially Independence Day this Friday. Wave your flag!!

Happy 4th to you, 

Gary D. Halbert


Another view on the retirement account tax windfall.

The real appeal of America – good 4th of July reading.

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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc. Gary D. Halbert is the president and CEO of Halbert Wealth Management, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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