Are US deficit forecasts too large?

Uncle Sam's books are aglow with red ink.

Experts reckon the federal deficit will be at least $400 billion in the current fiscal year.

Over the next 10 years, the deficit will mount to a cumulative $4.1 trillion, figures the Center on Budget and Policy Priorities (CBPP) in Washington. That calculation assumes the tax cuts in this year's tax legislation are extended and the extra costs of the Iraqi occupation and of a Medicare prescription-drug program are included.

The deficit in 2013 will be $530 billion, this projection maintains. After the baby boomers retire and collect their Social Security and Medicare payments, the budget picture looks even worse.

The Social Security trust funds will be exhausted in 2042. Thereafter, payroll taxes will not be sufficient to cover quite fully the benefits promised retirees and the disabled. The funds would need another $3.5 billion in today's dollars, earning interest at Treasury rates, to pay all scheduled benefits over the next 75 years, the Social Security Board of Trustees reports. The long-term financial problems are "very serious," states Jo Anne Barnhart, commissioner of Social Security.

Medicare is in worse shape, with unfunded benefits equaling $5.9 trillion.

It all sounds horrific. But it may not be so bad. The Social Security deficit projected by actuaries amounts to 1.92 percent of the total payroll that will be taxable over 75 years. As a percentage of national income, the shortfall is less than three-quarters of 1 percent. And real wages by 2042 - when the shortfall begins - will be about 40 percent higher than today because of higher productivity.

Even if no adjustments to Social Security are made, retirees in 2042 could be more affluent than those of today.

Further, new research suggests federal-revenue estimates in long-term budget projections, such as those made by the Congressional Budget Office, the scorekeeper for Congress, may be far too modest.

"There is some good news," says Michael Boskin, chairman of the Council of Economic Advisers under the first President Bush. In a lengthy new paper, Mr. Boskin calculates that total deferred tax on retirement-saving vehicles, such as 401(k)s, IRAs, some life insurance, private and government pensions - money owed to Washington eventually - amounts to almost $12 trillion, when calculated in terms of today's dollars.

That's as large as the sum of the 75-year actuarial deficits in Social Security and Medicare, plus today's total national debt. It's big, big money.

This huge stash of future revenues could make Uncle Sam's fiscal burden easier to manage in the decades ahead.

"I'm not saying the whole $12 trillion is left out of their [CBO long-term] calculation," says Mr. Boskin, now a Stanford University economist. "But a sizable piece of it is."

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