January 24, 2013

Bryan R. Lawrence is founder of Oakcliff Capital, a New York-based investment partnership.

The 2012 annual report for the federal government, released last week, continues to use dubious accounting standards to avoid putting the cost of government retirement promises into the headline deficit of $1.1 trillion. But its disclosures have improved somewhat, and the new information should be read closely.

One example is the cost, in today’s dollars, to make Social Security and Medicare solvent for the next 75 years. This grew to $38.6 trillion, an increase of $4.7 trillion over the prior year. According to the report, Americans’ aging drove $1.6 trillion of the increase; the rest mostly reflected poorer-than-expected economic growth.

The Government Accountability Office noted that “the economic recovery has been slower than was assumed” and pointed to a reduction in hours worked by average Americans and an increase in the number of disabled Americans. These trends mean less revenue for Social Security and Medicare from future payroll taxes, so we need an additional $3.1 trillion in today’s dollars — or tomorrow’s income taxes — to pay for the programs.

This is not surprising. Real gross domestic product grew at just 1.6 percent annually from 2001 to 2011, and the Treasury assumes a future growth rate of 2.1 percent. But the average annual growth rate from 1951 through 2001 was 3.4 percent. Every year of slow growth decreases the amount brought in from payroll taxes. This hits younger Americans twice, with a smaller economy and higher personal income tax rates to pay for baby-boomer retirements. It’s like the Woody Allen joke about the food being terrible and coming in such small portions.

Absent from our debate about cutting entitlements and raising taxes on the wealthy is the question of how to raise the economy’s growth rate. Without the 3 percent growth that the U.S. economy has historically delivered, the promises we have made ourselves will be even more unaffordable. Why aren’t we focused on boosting growth?

Another example of improved disclosure: The report keeps the “trust fund perspective” accounting used for years to claim falsely that Social Security and Medicare are solvent, but it adds a “government perspective” that calculates the shortfall facing the programs and the government as a whole. Rather than talk about phantom trust funds, Treasury says that if taxes rose and/or spending fell by 2.7 percent of GDP for each of the next 75 years, the government’s public debt would stabilize at the 2012 level of 73 percent of GDP.

This highlights the continuing disagreement between Treasury and some Medicare trustees, who have again refused to accept Treasury’s assumption that the Affordable Care Act will slow the growth in health-care costs.

That 2010 measure is primarily an expansion of insurance coverage, but it included several pilot programs designed to reduce costs. President Obama has said these must be given time to work, but Medicare trustees say that they are likely to fail and point to Congress’s continued overrides of its own cost controls (such as the repeated Medicare “doc fix” on payments). A recent example is language slipped at the last minute into the American Taxpayer Relief Act that will delay price restraints on a pill, sold by the biotech company Amgen, that will cost Medicare as much as $500 million.

Another cause for skepticism is the outcome of Obama’s first pilot program. In 2005, the Rand Corp. argued that the adoption of electronic health records by doctors would improve care and save $81 billion per year. Obama pushed for the 2009 stimulus legislation to pay physicians to install the systems. Doctors and hospitals were paid $25.9 billion, but the systems “seem to be aimed more at increasing billing by providers than at improving care or saving money,” the New York Times reported this month, and a new Rand study concluded that the program has failed to reduce costs.

To reflect doubts about the Affordable Care Act’s pilot programs, the GAO’s year-end calculations included cases in which health-care costs grow 1 and 2 percent faster than Treasury assumes. What is the impact? The 2.7 percent shortfall becomes 5.6 to 8.7 percent of GDP. And if we delay closing the gap for 10 more years, it becomes 6.7 to 10.5 ­percent.

To put that in context, consider that the recent tax increase on the rich will raise just $60 billion a year, or 0.4 percent of GDP, and that the total amount of federal personal income taxes since 1945 has varied between 6 and 10 percent of GDP, despite marginal tax rates ranging from 28 to 94 percent.

In other words, if the pilot programs fail, personal income taxes on all Americans would have to increase to unprecedented levels. Taxes that high will crush growth, making health-care promises even less affordable.

When a drug company that gives $5 million to elected officials can get a $500 million handout, why should we have confidence in the Affordable Care Act’s cost controls? Our health-care system is broken — so why are we expanding, rather than restructuring, it? And why should we raise taxes to pay for it?

Every other developed country delivers universal health care with better results and lower costs. The U.S. government’s own annual report shows that our finances are unsustainable unless we do the same.