Government Waste

Congress passed the Improper Payments Elimination and Recovery Act of 2010 that was intended to eliminate improper payments made by the federal government. The legislation also requires the General Accounting Office to issue an annual report on the effectiveness of the government in identifying and eliminating improper payments.

The report on Fiscal 2015 spending was recently released and the findings were not encouraging. Of the 15 agencies examined, the total improper payments were estimated to be $132 billion. This represents nearly 4% of all federal spending in Fiscal 2015. While these are only estimates, the percentage and amount is fairly consistent with prior years.

It's currently estimated the federal government made improper payments of $1.2 trillion between 2003 and 2016. This means that at least 5% of the $20 trillion national debt is a result of waste, fraud and abuse. To add more salt to the wound, there doesn't seem to be any major shift in the near future that will dramatically reduce the amount of improper payments.

What is your reaction to the federal government wasting more than $1 trillion because of financial mismanagement?

Proposed Income Tax Changes - Part I

President-elect Trump campaigned on lowering tax rates as part of his plan to spur economic and job growth. There are a lot of details to his plan, which are far more extensive than what can be covered in a single article. Below is a summary of some the essential changes.

Tax Rates for Married-Filing Jointly taxpayers

• 12% for income less than $75,000
• 25% for income $75,001 - $225,000
• 33% for income over 225,000

The brackets for single taxpayers will be 50% of the above amounts and the head-of-household status will be eliminated. An unmarried person who has a qualified dependent (e.g., single parent with child) is an example of a head-of-household taxpayer.

The current preferential rate of 20% for long-term capital gains will be maintained using the above tax brackets. The 0.9% Medicare surtax on wages in excess of $250,000 and the 3.8% Medicare tax will be eliminated, assuming the Affordable Care Act is repealed.

For corporate taxpayers, the rate will decrease from 35% to a flat 15%. 

It's estimated that U.S. multi-national companies (e.g., Apple, Microsoft and General Electric) have more than $3 trillion of earnings attributable to non-U.S. sales that have not been subject to U.S. taxation. There will be a one-time 10% tax assessed for the deemed repatriation of foreign earnings by U.S. corporations. This is an incentive for U.S. companies to bring the money back to the U.S., which is intended to spur economic growth through business expansion, acquisitions and buying back company stock.

It's difficult to predict which, if any, of the above provisions will enacted, but these changes form the foundation of President-elect Trump's tax plan.

Social Security and the Inflation Conundrum

Under current law, Social Security beneficiaries receive an annual cost of living adjustment (COLA) to their payments based upon the current inflation rate. For 2017, recipient payments will increase 0.3% based upon the inflation rate as measured by the Consumer Price Index (CPI). This translates into an average payment increase of $5 per month for each beneficiary.

Any increase is better than nothing, but does anyone realistically believe a $5 per month increase will cover the increased cost of living a retiree will likely experience next year?

According to some estimates, the real cost of inflation for retirees is closer to 2%. The difference is the cost of things seniors typically buy are rising more rapidly than the average cost of all goods and services. For example, medical costs continue to rise while the cost of consumer electronics is declining (think of the cost of a big-screen tv today vs. 10 years ago). Are seniors more likely to incur medical expenses or purchase more consumer electronics?

Although seniors may need or deserve a larger COLA, there is long-term problem with higher annual increases. The higher inflation rate, the sooner Social Security will become insolvent. Social Security paid $743 billion to retirees in Fiscal 2015. A 0.3% increase translates into an extra $2.2 billion in payments for Fiscal 2016; not accounting for any increase in the number of beneficiaries. A 2% increase would cost an additional $14.8 billion. An extra $12.6 billion may not seem like a lot, but the compound effect of a 1.7% increase over 10 years would be an extra $750 billion. 

Under the current projections, Social Security is expected to become insolvent in 2035. The higher the annual COLA, the sooner this will occur. Consequently, what may be good for seniors in the short-term may be bad for them in the long run.

Determining the inflation rate for Social Security payments presents a conundrum. Do we continue with the current basis for adjusting Social Security payments, or should we increase the Social Security COLA to a more realistic rate, knowing it exacerbate the long-term solvency problem?

Mandatory Spending - Not Necessarily

Congress essentially classifies federal spending as either discretionary or mandatory.

Discretionary spending is not fixed or guaranteed and is subject to annual appropriations. Since it's discretionary, in theory anything can be added or eliminated. In practicality, only a small percentage of discretionary spending is actually subject to change. Consider regulatory agencies like the Food and Drug Administration (FDA) or Securities and Exchange Commission (SEC). These agencies might make some changes by adding staff, eliminating programs or shifting resources, but they can't dramatically alter operations every year. Therefore, most discretionary expenditures are somewhat fixed.

Mandatory spending doesn't require annual appropriations and is essentially on auto-pilot. The spending is typically based on some eligibility criteria and it expenditure is made as long as the criteria is met. Social Security, Medicare and Medicaid are the three largest types of mandatory spending. Although Congress treats mandatory expenditures as beyond of their control, all mandatory spending can be changed or eliminated by passing new legislation. For example, Congress can raise the age of eligibility for Social Security retirement benefits from 67 to 70 by passing a new law, which would cause Social Security spending to decrease for the year. Politically it may be difficult, but it can be done.

Although nearly two-thirds of all current federal spending is classified as mandatory and on auto-pilot. Congress has the Constitutional power to change any and all federal spending, if they choose; both discretionary and mandatory. In short... Congress controls all spending and balancing the budget may not be easy, but it can be done.

Status of the Fiscal 2017 Budget Legislation

As described in the prior post, Congress is supposed to pass a Budget Resolution followed by 12 separate Appropriations Bills. With one week left before Fiscal 2017 starts, the status of the 13 different pieces of legislation is outlined below.

• The Budget Resolution - Passed out of the House Budget Committee on March 16, 2016. It has not been voted upon by the entire House of Representatives or the Senate.
• Agriculture - Passed by the House and Senate Committees by May 19th but not voted on by either Chamber.
• Commerce/Justice/Science - Passed by the House and Senate Committees by April 21 but not voted on by either Chamber.
• Defense - Passed by the House on June 16 but Senate twice rejected a cloture motion required to vote on the House bill.
• Energy and Water - Passed by the House and Senate but waiting on a Conference Committee to reconcile the differences.
• Financial Services - Passed by the House on July 7 but no vote by the Senate.
• Homeland Security - Passed by the House and Senate Committees by May 26 but not voted on by either Chamber.
• Interior and Environment - Passed by the House on July 14 but no vote by the Senate.
• Labor/HHS/Education - Passed by the House and Senate Committees by July 14 but not voted on by either Chamber.
• Legislative Branch - Passed by the House on June 10 but no vote by the Senate
• Military/Veterans - Passed by the House and Senate, but three times Senate rejected a cloture motion required to vote on the conference report reconciling the differences between the House and Senate versions.
• State/Foreign Affairs - Passed by the House and Senate Committees by July 12 but not voted on by either Chamber.
• Transportation/HUD - Passed by the House and Senate Committees by May 24 but not voted on by either Chamber.

Although the required legislation is in different stages of the process, Congress is 0-13 with one week before the start of a new fiscal year. The Senate is already making preparations for a Continuing Resolution to keep the government from shutting down on October 1.

We'll provide more updates next week.

The Budget Process-As It's Supposed to Work

Congress has established a process for how the budget process is supposed to work. However, this process has not been followed for years.

Below is a quick synopsis of the process.

• The President delivers his proposed budget between the last Monday in January and the first Monday in February.
• The Congressional Budget Office (CBO) scores the President's proposed, which estimates the projected revenues and expenditures and the CBO results are compared to the estimates prepared by the Office of Management and Budget (OMB)
• The House and Senate pass a Budget Resolution outlining the revenue and spending priorities of Congress. As a Congressional Resolution,  the President does not sign the Budget Resolution.
• Congress passes 12 separate Appropriations Bills authorizing the specific spending by the various Departments and Agencies of the U.S. government.

The last time Congress passed all 12 appropriations bills on time was in 1994. For the last 20+ years, they have consistently used omnibus spending bills and continuing resolutions, where they combine more than one appropriations bills (or all of them), into one piece of must-pass legislation, to fund the government. 

Is it possible there is a correlation between the departure from the established budget process and the increase in annual budget deficits?

The next post will provide a status overview of the Fiscal 2017 budget and appropriations bills.

Social Security and Medicare-Touch the Third Rail?

One of the most contentious issues in modern American politics involves changes to Social Security and Medicare. The subject is often referred to as the third-rail of politics.

The third rail references the high voltage rail of electric trains and subways. Contact with the third rail can lead to death. In politics, the same goes Social Security. Proposing to change the current program can lead to political suicide, or at least the loss of an election. Since getting re-election is a high priority for most politicians, it's understandable why politicians try to avoid this topic as much as possible.

No matter how hard the resistance, Social Security and Medicare will change. Why? Social Security and Medicare programs are spending more than they are currently collecting in taxes. Ignoring the potential concerns about the Social Security Trust Fund and the "Lockbox" (which are addressed in A Sinking Nation), the U.S. government predicts the retirement surplus of Social Security will be depleted by 2034 and the disability funds will be depleted by 2023. Consequently, even without any legislative revisions, future benefits will eventually be reduced to about 70% of the amount due because of a lack of funds. Of course, Congress could proactively pass legislation to fix the problem, but it would require them to touch that third rail.

Although 2034 sounds like a long time in the future, it's less than 18 years away. Do you remember Y2k and the start of a new millennium? Seem like a long time ago? The new millennium started 16 years ago, and we're nearly halfway to 2034. In reality, 2034 will be here before you know it.

Unless something changes dramatically in Washington, don't expect Congress to take any action on Social Security in the near term. However, the fact remains... changes to Social Security will eventually occur; either through legislative changes or a lack of money.

The Trillion Dollar Plugs

Stories continually surface about fraud, waste and abuse of taxpayer dollars. Whether fact, fiction, big or small, they all have a common thread; an erosion of public trust in the government. Financial mismanagement can occur with individuals, companies and charities as well, but given the enormity of the U.S. government, errors by the federal government impacts a large number of people.

Wasteful spending by the Department of Defense seems to be a recurring problem. Ever heard about those $600 dollar toilet seats? Last week a Department of Defense Inspector General report discovered the U.S. Army's accounting records were so bad, they recorded $6.5 trillion of wrong accounting entries in Fiscal 2015 in order for their books to balance. 

In the world of accounting, a "plug" is referred to an amount that can't be identified but is recorded to balance the books. As a simple example, you may be balancing your checkbook and you're off by $10 that you can't find. What do you do? You simply adjust the balance by $10 for your checkbook to be in balance with the bank. Accountants refer to the $10 as a plug.

Back to the U.S. Army. In order for Army's books to balance last year, the cumulative total of their plugs was $6.5 trillion. That doesn't necessarily mean they lost $6.5 trillion or there was that much fraud. However, it does indicate some fairly atrocious accounting practices. The budget for the entire Department of Defense was less than $600 billion in 2015. It's unfathomable how one branch of the military could have errors more than 10 times the entire Defense budget.

These trillion dollar plugs may be primarily accounting errors and not the loss of real dollars. However, it doesn't instill much confidence in the government's ability to appropriately manage our money if their systems are that messed up.

Why Cutting Spending to Balance the Budget is Easier Said than Done

When you have lived beyond your means for any length of time, it's never easy to find ways to spend less than you make. This applies to individuals, business and the U.S. government. 

One challenge for the federal government is the length of time it has been overspending. Having only balanced the budget once in the last 55 years, there is clearly a mindset and pattern of overspending that will be hard to change. A majority of Senators, Representatives and the President must be willing to endure the potential wrath of disgruntled voters who are affected by the spending cuts or tax increases to balance the budget, which is something they have generally been reluctant to do for more than 50 years.

It may seem like the simple answer to achieve a balanced budget is to cut spending. However, the composition of federal spending makes it more difficult task than it sounds.

For Fiscal 2015, the federal government spent approximately $3.6 trillion. Of that amount $2.6 trillion was for Social Security, means-tested entitlements (e.g., unemployment benefits, Medicaid, food assistance, children's health programs and interest on the debt). You can't cut the interest payments on the debt, and it would be a major political battle to reduce Social Security and other entitlement programs. If none of these programs can be reduced, that leaves about $1 trillion of spending available to cut.

The total deficit for Fiscal 2015 was $438 billion. Consequently, all of the remaining programs would have to be slashed by more than 40% to achieve a balanced budget. That includes defense, education, transportation, homeland security and virtually every other federal agency. Fiscal 2015 defense spending was $538 billion, so if defense spending was excluded, all other federal spending would be effectively be eliminated.

Given the parameters of paying interest on the debt and maintaining Social Security and other entitlement spending, it's understandable why Congress has been unable to reduce spending to balance the budget. Although it will be necessary to reduce spending in order to balance the budget, the idea of simply cutting spending to balance the budget, without some form of Social Security or entitlement reform, is much easier said than done.

Deficit Spending: The Exception or the Rule

Deficit spending occurs when expenditures exceed revenues. In the past 80 years, the U.S. government has spent less than it received a mere seven times. It has happened only once since 1960 (in 2000). With this track record, it seems fairly clear that deficit spending is the Rule for Washington and not the Exception. 

There may have been lots of economic, political and social reasons why the government has incurred a budget deficit, but the pattern is clear. The U.S. government continuously spends more than it receives. 

With this track record, any sane financial adviser would tell you to change your behavior. You simply can't spend more than you make forever, and neither can the U.S. government. Despite the warnings and some attempts by Congress to balance the budget, Congress has not been able to break the habit of overspending. Based on the current budget projections, the U.S. will continue to deficit spend for the next decade.

What will it take for our government to change the habit from deficit spending to balanced budgets, at least more than once every 50+ years?

Debt and Deficit-The Purpose

Concerned about the $19 trillion debt the U.S. government has accumulated? 

Confused about what is fact; what is fiction; what is truth; and what is political spin?

Connect with other like-minded people though the Debt and Deficit website and blog to enhance your comprehension of the issues involving the U.S. debt and deficit. We don't pretend to have all of the answers. However, we're committed to understanding the issues and exploring potential solutions to the daunting financial issues facing our country. 

We encourage you and others to get involved in the conversation on this site, through similar sites, organizations and in the political process. This site is not intended to be an echo chamber where everyone has the same political affiliations or espouses the same ideas. We encourage people to share different perspectives and ideas. Therefore, it's important to be respectful of others who disagree with your ideas and positions. You can criticize an idea without attacking a person or group of people in the process. Harassing and inappropriate comments or posts will be deleted.

The issues are immense and the solutions are elusive, but in some way, we intend for this site to give some voice to We the People who want to help secure the financial future of our great nation. We welcome you to the conversation.