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What's America Really Worth?

December 2, 2019

By Tom Visotsky, CPA 


The U.S. Federal Reserve estimated that Americans had a net worth of $108 trillion (T) as of Sept. 30, 2018 ($124T in assets, offset by $16T in liabilities). How does this compare to our federal government’s net worth? The answer is sobering. 




Wartime spending caused our debt-to-GDP ratio to spike to an all-time high of 106 percent in 1946which then decreased rapidly to a low of just 23 percent in 1974. The ratio then grew rapidly from the mid-1970s to 48 percent in 19931995. 


According to Management’s Discussion & Analysis (MD&A) in the 2018 Financial Report of the United States Governmentstrong economic growth and fundamental fiscal decisions, including measures to reduce the federal deficit and implementation of binding Pay As You Go (PAYGO) policies (which required that new tax or spending laws not add to the deficit), generated a significant decline in the debt-to-GDP ratio to 31 percent in 2001. 


PAYGO rules were allowed to lapse, significant tax cuts were implemented in 2001, entitlements were expanded and spending related to defense and homeland security increased after the 9/11 attacks. By September 2008, the debt-to-GDP ratio was 39 percent of GDP.” 


Easy money policies, low interest rates and lax lending standards were major factors leading to the financial crisis in 2008, met by historic spending increases by the federal government, pushing the debt-to-GDP ratio up to 74 percent in 2014. It stood at 78 percent of GDP at the end of FY 2018. 


 In short, debt has exploded higher since 2001, having doubled in just the last 10 years from 39 percent of GDP to 78 percent. 




U.S. Treasury Secretary Steven Mnuchin’s cover letter to the government’s financials, A Message from the Secretary, proclaims that “driven by the Tax Cuts and Jobs Act and regulatory relief, United States GDP grew by 3.1 percent in calendar year 2018, the highest Q4 over Q4 growth that we have realized in thirteen years. Unemployment declined to a 49-year low, and American workers continued to take home more in their paychecks.”  


Unfortunately, even with those stellar economic conditions, the government had another large 2018 Net Operating Loss (NOL) that was flat with the prior year. Even worse, the off-balance-sheet accrued liabilities for Social Security and Medicare soared. Let’s look at the government’s bottom line in this strong economy.  




The U.S. Treasury Department’s 2018 annual report is 255 pages long and includes an MD&A section highlighting the primary issues facing the country. The report is publicly available at fiscal.treasury.gov/reports-statements/.  There is also a wealth of information available at usaspending.gov. 


Our Nation By the Numbers 


The government reported a budget deficit of $779B on a cash basis, and $1.159T on an accrual basis. Over the last five years, the cash basis budget deficits totaled $2.95T. The accrual basis Net Operating Cost was $4.67T, $1.72T (58 percent) greater than the cash basis numbers typically focused on by the media and the public. Table 1 shows this for 2018, and that we now spend $1.34 for every $1 we take in as revenuea very difficult problem to fix. 


Balance Sheet  


Gross debt of the U.S. government (shown in Tables 2 and 3) as of the close of the last fiscal year ending Sept. 30, 2018, was $105T, composed of $25T on the balance sheet and footnotes showing additional amounts of $74T of unfunded liabilities for Social Security and Medicareand $6T owed to trust funds. 


If you haven’t done the math, it would take 97 percent of all assets in America to fund the government’s liabilities on a present value accrual basis! In other words, we’re broke, but most people don’t know it yet. And it gets even worse. 


By its own estimates, the government is projected to run deficits of more than $1T annually, FOREVERand that is assuming we never have another recession. As we continue to run these $1T+ annual deficits, the balance sheet will get even worse. Of course, a number of multi-billionaires like Bill Gates and Warren Buffett have publicly announced that they will be giving away much of their fortune to various charitable causes, so little of that money will ever accrue to the government, making the government’s balance sheet substantially worse.  


Table 2 summarizes the most significant portions of the government’s balance sheet. Assets of $3.8T, offset by liabilities of $25.4T, leaves a negative net position of $21.5T.


Table 3 highlights how the balance sheet would look from a corporate perspective. It shows the recorded liabilities of $25.4T (as shown in Table 2)additional debt to trust funds (TF) of $5.8T; and unfunded liabilities (UL) for future trust fund payouts of $73.5T, for a total of $104.7T. These relate to various stakeholder amounts similar to loss per share or debt per share.


Basically, in order to pay for the government’s debts and promises in today’s dollars, each man, woman and child would have to write a check for $320,000. Since not many children have savings, a tax on every full-time worker would require $824,000. It has been reported that 50 percent of the population has less than 1 percent of the net assets of Americans and would have to borrow money to pay for a minor car repair. Excluding those means that the top 50 percent of wage earners would each owe $1,636,000 to pay their share of the government’s debts!   


Statement of Social Insurance (SOSI)  


The SOSI provides perspective on the government’s long-term actuarial present value exposure for social insurance programs, namely Social Security, Medicare, Railroad Retirement and Black Lung. Surprisingly, the MD&A states, under federal accounting rules, social insurance amounts as reported in both the SLTFP (Statement of Long Term Fiscal Projections) and the SOSI are not considered liabilities” on the governments financial statements, but are detailed in a footnote. “In the federal budget the term trust fund means only that the law requires a particular fund be accounted for separately, used only for a specified purpose, and designated as a trust fund…” In essence, “funds from dedicated collections are government owned.” This is completely different than anyone’s pension, 401(k) or IRA plan, in which you own the assets in the plan.  


The MD&A shows an “Open Group” total liability of $53.8T, but that number distracts from the fact that the Closed Group liability of $73.5T is the one we should be focusing on. 


The Open Group includes proceeds from future retirees. Showing the Open Group total would be akin to someone paying themselves out of your 401(k) account. In effect, they would be spending your retirement, and telling you to take yours from a future retiree.  


The Closed Group only reflects current participants. Think of it from a corporate perspective with a defined benefit pension plan. The $73.5T liability is the estimated amount required to be put aside today to cover the costs of a Closed Group, which reflects only current participants, over a 75- year projection period. As no action appears on the horizon, these liabilities are virtually certain to grow significantly every year until Congress decides to address the problem. 


Even including all the funds the government borrowed from the trusts, as well as future receipts from those who haven’t qualified for coverage, the 2018 Medicare Trustees Report indicates that the Medicare trust fund is projected to be depleted by 2026, and the Social Security trust fund in 2034. The U.S. Government Accountability Office (GAO) points out that “as previously discussed and as noted in the Trustees’ Reports, it is apparent that these programs are on a fiscally unsustainable path.” In addition, the GAO was prevented from expressing an opinion on the SOSI as cost reductions based on planned efficiencies are unlikely to be achieved. 


“Trust” Fund “Investments” 


The government’s financials reveal that it “has about $5.8T in intragovernmental debt outstanding, which arises when one part of the government borrows from another. It represents debt issued by the Treasury and held by government accounts, including Social Security ($2.9T), Civil Service Retirement ($923B), Military Retirement ($743B) and Medicare ($302B) trust funds.” These amounts are “eliminated as part of the consolidation process.” Virtually all of these “trust fund” assets have already been used to pay government operating expenses. When it comes time to repay this borrowing, “the government will need to obtain the resources necessary to reimburse the trust funds” (i.e., the government will need to borrow 100 percent of the amount owed to replenish the trust funds assets it has already spent on annual operating expenses). In spite of thatthe amounts are NOT shown on the balance sheet since “these amounts are both liabilities of the Treasury and assets of the government trust funds (so) they are eliminated as part of the consolidation process” the MD&A states.   


To be clear, our government’s policy is to take our individual and corporate withholdings for Social Security and Medicare, briefly put them in a Trust Fund, take all of that money and replace it with a non-negotiable IOU and then spend all that money to cover annual operating expenses and NOLs. Any corporation doing this would have to at least record a liability to the fund on their financial statements and the trustees and corporate officers would likely face indictment and jail time.   


This scheme, in which the government spends all retirement funds and replaces them with an IOU (like it does with non-negotiable Treasury bonds), is a relic. Many nations have graduated to actual investment funds for their current and future retirees.  


A leading example is Australia. The population of Australia is only 25 million, but retirement funds (called superannuation funds) have $2.7T in investments in the retirement system. Accounts, similar to IRAs in the U.S., are set up with mandatory corporate contributions of 9.5 percent of employee earnings as well as voluntary employee contributions. The Australian government initiated compulsory employer contributions in 1992. These funds now equal 131 percent of GDP in 2018, with nearly all of the assets in private pension funds, invested in stocks, bonds and mutual funds. 


Department of Defense 


The U.S. Department of Defense (DoD) operated at a net cost of $698B. According to the Stockholm International Peace Research Institute, the United States spends as much on defense as the next nine largest spenders combined (China, Saudi Arabia, Russia, India, United Kingdom, France, Japan, Germany, South Korea and Brazil). What amount should be spent on defense is hard to say, but the fact is that DoD is the largest expense item after the mandated programs for Medicare and Social Security.   


Docosts are equal to about 21 percent of the government’s total receipts (15 percent of total expenses), but the GAO Statement of the Comptroller General of the United States says it could not render an opinion due to “serious financial management problems at DoD that have prevented its financial statements from being auditable.” While progress has been made, this has been a problem “since the government began preparing consolidated financial statements over 20 years ago.”   


Loans Receivable and Loan Guarantee Liabilities 


According to the government’s financials, direct loans and loan guarantee programs are used to promote the nation’s welfare by making financing available to segments of the population not served adequately by non-federal institutions.” There are $1.4T in loans receivable, predominately student loans, as well as $2.6T in loan guarantee liabilities, predominantly FHA and veterans housing benefit programs. There have been questions on the collectability of some of the student loans, as the average balance and the total receivable grows each year. 




The government closed FY 2018 with a $1.2T Net Operating Loss (NOL), $15.8T of publicly held debt and $8T of liabilities for federal employee and veterans benefits. As the government takes advantage of historically low interest rates on the short end, more and more debt gets rolled over each year. To finance the $1.2T NOL, the government borrowed $10.1T and paid off $9T. The $10.1T borrowed last year represents 64 percent of the $15.8T of federal debt outstanding. The Federal Reserve owns $1.78T of longer dated securities with an average maturity of 8.1 yearsimplying that the average maturity of the rest of the debt in the hands of the public is quite short. This means the United States is exposed to both interest rate and liquidity risks that are much greater than if the outstanding debt was concentrated in 10-, 20- or 30-year bonds. 


A normalization of monetary policy could lead to interest rates at or above historical levels. Treasury yields of 5 to 6 percent were normal before the last financial crisis a decade ago. With U.S. debt at $15.8T, we recorded $357B in interest expense last year, for an average interest rate of 2.2 percent. With debt growing $1.2T a year, an increase in rates could be devastating. Even a normalization of rates to 5.2 percent adds an additional $500B annually to our interest cost at current debt levels.  




The U.S. Federal Reserve Bank (Fed) has taken extraordinary measures to stimulate the economy by facilitating the government’s borrowing with low interest rates. However, it should be noted that none of the Fed’s activities arincluded in the federal budget. It is considered an independent central bank, and its decisions are not ratified by the executive branch of the federal government. Also excluded from the statements are all fiduciary funds and Government Sponsored Enterprises (GSE), such as the Federal National Mortgage Association (Fannie Mae), Federal Home Loan Banks, Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal Farm Credit Bank. 


The Fed held $4.1T of System Open Market Account (SOMA) securities as of Sept. 30, 2018. This is up substantially from the pre-crisis levels in 2006 of $900B, but down from peak levels of $4.5T in 2014. Current holdings include $1.78T of Treasury securities (excluding those used in overnight reverse purchase transactions) with an average maturity of 8.1 years, and $1.7T of mortgage-backed securities with an average maturity of seven years. The Fed still holds 14 percent of all Treasury securities and 25 percent of all fixed-rate agency mortgage-backed securities.  


The Fed’s balance sheet is $3T larger than pre-crisis levels, but it has announced plans to stop shrinking its balance sheet by the end of September 2019. Reserve banks around the world have participated in Quantitative Easing (QE) as a reflex to counteract the last recession. It should be kept in mind that when the Fed purchases Treasury and mortgage securities, it does so, in effect, by printing money. That is transferring spendable cash to the Treasury in exchange for booking a receivable on the books of the Federal Reserve. While it has been successful to this point, history has shown that countries that print too much money end up with currency stability problems. Unfortunately, no one knows exactly what that level is until after the fact. 




In its Independent Auditor’s Report, the GAO states that “material weaknesses in internal control over financial reporting  continued to prevent us from expressing an opinion on the  accrual-based consolidated financial statements.” The GAO also says “significant uncertainties  primarily related to the achievement of projected reductions in Medicare cost growth, prevented us from expressing an opinion on the sustainability financial statements, which consist of the  Statement of Long-Term Fiscal Projections  Statements of Social Insurance  and Statement of Changes in Social Insurance Amounts.” 




Many risk factors that could impact the government’s finances lurk in the background. A few are: 


Unrealistic Assumptions: According to the Committee For A Responsible Budget, “the Bipartisan Budget Act (BBA) of 2018 increased spending by 16 percent between 2017 and 2019, but allows for a 10 percent spending drop in 2020. Avoiding this cliff by continuing current spending levels in real terms would add about $2 trillion in debt over the decade.” If past is prologue, those cuts won’t happen, and we’ll end up with larger deficits. 


The Economy: This summer, the American economy reached its longest economic expansion in U.S. history. While this is great news on the surface, unless we have escaped all historical precedents and repealed cyclical downturns, we’re likely to have another recession at some point. Many major economies have already slowed down. Whether this is the pause that refreshes, or the first signs of a downturn, no one knows for sure. Any downturn would surely create even larger deficits due to unemployment, as well as increased government spending to try to pump up the economy and get it moving forward. 


Automation: CNN reported in June 2019 that Oxford Economics expects robots to displace 20 million manufacturing jobs worldwide over the next decade. While there are many positives to automation, their “research shows that the negative effects of robotization are disproportionately felt in the lower income regions of the same country.” This could potentially exacerbate the wealth gap in America.  




While the focus of this article is the financial condition of the federal government, one must keep in mind the very significant financial dependency that state and local governments have on dollars flowing from the federal government. In the lead article in the spring 2016 issue of the AGA Journal of Government Financial Management“Last Call for Common Sense  In Addressing the Fiscal Sustainability of the Federal Government, VSCPA member Edward J. Mazur, CPA, former Virginia state comptroller and controller who headed the U.S. Office of Management and Budget’s Office of Federal Financial Management, makes a compelling case that state governments rely heavily on the federal government: 


“… state governments received, on average, 32.6 percent of their 2013 revenues in the form of grants and other direct payments from the federal government. This included $2,532B of payments to individuals for wages, pensions, Social Security (and) Medicare; $391B (for) federal purchases from State businesses; (and) $67B (for) Direct federal grants to Local governments’ … The total of direct federal flows to state governments when combined with indirect federal flows equated on average to 26.7 percent of state GDP.”  


Mazur’s article summarizes this dependency, while noting the opportunity for state level leadership to help address the problem of federal sustainability as follows:  


No one can be shielded from the impact of a fiscally unsustainable federal government  We are all lashed to the same mast, and the ship is slowly sinking. Individual citizens, business enterprises, nonprofit organizations, and state and local governments are all adversely impacted by the federal government’s fiscal unsustainability today. This will worsen if the root causes are not addressed and reversed … We can restore federal fiscal sustainability  The federal government can be returned to a position of long-term fiscal sustainability. It will take an extraordinary partnership of all levels of government and all components of the American society. It will clearly take a new way of communicating difficult choices to the American public and in securing its understanding and support.” 




We posed the question that as the richest country in the world, how are we doing financially and how much are we worth? The stunning answer is that on an accrual basis, we expect to lose $1T+ annually and the government’s negative net worth is essentially equal to all of the individual net worth in America. Unfortunately, it’s on a path to get worse virtually every year, and little is being done to try to fix it.  


The GAO states in the government’s financial report executive summary that “during fiscal year 2018, economic growth and the pace of job creation each accelerated, and the unemployment rate declined to a 49-year low.” Which begs the question: How did we manage to lose $1.2during a strong economy, record low unemployment and historically low interest rates? Clearly, we have a structural problem with expenses far outstripping receipts. 


Certainly, you could not eliminate all (if any) of the many critical departments listed under “other” above. To illustrate how bad a shape we’re in, even if you did eliminate their entire $958B in annual cost, you’re still left with a $250B hole in the budget. Of course, cuts of that size would almost surely cause a recession, which would then make other expenses rise. 


The GAO projects that debt-to-GDP ratios will soar from 78 percent currently to 530