The Economy: "America's Hidden Debt Bombs"
by Jeanne Sahadi
"Our budget doesn't have Fannie Mae and Freddie Mac on it, even though it's owned lock, stock and barrel by the American taxpayer," said Rudolph Penner, a former director of the Congressional Budget Office (CBO) during a conference held by the Peterson-Pew Commission on Budget Reform. Last year, the CBO did start to account for both companies as if they were federal agencies on the budget. But the White House Budget Office only includes some potential costs because the future of the two companies is still under consideration. Last week, a Republican congressman introduced a bill that would require the two agencies be put on the budget.
It's still not clear what the companies' total hit to the federal budget will be. Amherst Securities, a broker-dealer in residential mortgage-backed securities, estimated that the total loss on the mortgages backed by the companies could reach $448 billion, with a portion of that covered by reserves or assumed by outside parties. The CBO estimated the net costs to the government could top $370 billion by 2020. These are just estimates. But what's clear is that Fannie and Freddie are not cheap dependents. That's why some argue that lawmakers should assess the potential costs of implicit government guarantees well before things go to pot.
Unfunded promises: The governments' accrued debt to the Social Security and Medicare trust funds is known. And making those payments - which begin in earnest this decade - won't be easy given the drop in federal revenue and the surge in government spending. "Lawmakers need to acknowledge they have no way of funding them right now," said tax expert Len Burman, a professor of public administration and economics at Syracuse University. But the piece of future entitlement debt that's not reflected under current budget protocols is what the government will have to pay into the system after its payments to the trust funds end - which will happen by 2037 for Social Security and within the next decade for Medicare. At that point, the programs will only be collecting enough in taxes to pay a portion of the benefits currently promised. There will be enormous pressure on the government to make up the difference, and Uncle Sam would have to borrow a lot of money to do so.
Some budget experts like Stuart Butler, vice president for domestic and economic policy at the conservative Heritage Foundation, would like to see the long-term obligations to Medicare and Social Security included in lawmakers' annual consideration of the federal budget. Right now, money allocated to both entitlement programs is considered "mandatory" spending and therefore the spending increases for the programs are on autopilot and the financial commitment is uncapped in future years.
True cost of tax breaks: Everybody loves tax breaks. And there's more than a trillion dollars of them to love. That's the amount of money the Treasury foregoes in annual revenue as a result of the many breaks in the tax code. And that effectively increases the government's need to borrow. But that trillion-plus isn't really up for consideration during annual budget discussions. "Tax expenditures are basically hidden," Burman said. No one advocates abolishing tax breaks altogether. But Burman and others believe tax breaks should be treated as discretionary spending. The idea is to bring them into the open so lawmakers can make a conscious decision annually about what they spend on tax breaks and recognize the costs associated with that decision.
Long-term costs of new rules: This year is the first year in which high-income investors with traditional IRAs or 401(k)s -- both of which let savings grow tax-deferred until withdrawn - will have a chance to convert their accounts into Roth IRAs, where investments grow tax-free. The new conversion rule is scored as a revenue raiser on the federal budget over the next decade because those who convert must pay the tax owed on their traditional IRA savings the year they convert. But long-term it's a different story. Since investments in the converted accounts will grow tax-free, Uncle Sam will collect less revenue than he otherwise might have had the investors kept their ever-larger savings in a traditional IRA and paid taxes on them in retirement. "It will cost federal coffers a lot beyond the 10-year window," Burman said."
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