Financially Unstable

GAO Report highlights skyrocketing costs of entitlements, </br>Obamacare’s failure to contain costs

January 17, 2013

The Government Accountability Office (GAO)’s annual audit of the government, released Thursday, raises serious concerns about the federal government’s long-term financial stability and the effectiveness of the Affordable Care Act's cost-curbing measures.

The report found "that—absent policy changes—the federal government continues to face an unsustainable fiscal path."

The GAO, which is an "independent, nonpartisan" government agency, released its annual report as Congress braces for a fight with President Barack Obama over the debt ceiling. Republicans are calling for spending cuts in exchange for raising the debt ceiling. The president has vowed not to negotiate with Congress.

The report notes that while the government’s net operating cost was about $1.3 trillion in Fiscal Year 2012, its "unified budget deficit" was $1.1 trillion that year, "and as of September 30, 2012, debt held by the public had increased to 73 percent of gross domestic product (GDP)."

The report criticizes "material weaknesses" in the government’s financial reporting and highlights the Department of Defense’s messy accounting records, citing "serious financial management problems at DOD that have prevented its financial statements from being auditable."

The GAO also criticized the government for overestimating the savings to entitlements, especially Medicare.

The report gave a "disclaimer of opinion" on the Statement of Social Insurance, which means that it did not accept the data in that part of the government’s finances. It cited "significant uncertainties … primarily related to the achievement of projected reductions in Medicare cost growth."

The GAO’s auditors "were unable to obtain sufficient evidence to support the amounts presented in the 2012, 2011, and 2010 Statements of Social Insurance and the 2012 and 2011 Statements of Changes in Social Insurance Amounts," meaning that the Statement of Social Insurance was underestimating the cost of entitlement programs.

Even using the government’s numbers, entitlements will drive the deficit in the future. The GAO notes that more than 70 percent, or $27.2 trillion, of projected government deficit spending over the next 75 years will come from Medicare programs.

"Management has noted that actual future costs for Medicare are likely to exceed those shown by the current-law projections presented in the 2012, 2011, and 2010 Statements of Social Insurance," the report said.

Robert Moffit, a domestic policy expert at the Heritage Foundation, distinguished between "current law" and "current policy" to explain the trouble in estimating the cost of Medicare.

Current law uses formulas to reduce the payments to physicians, for example, but Congress keeps blocking these reductions (which could be as high as 27 percent) with short-term legislation, Moffit said.

Likewise, Obamacare uses formulas that reduce payments to physicians and as a result reduce the cost of Medicare—cuts that many people, including Medicare’s own actuary and the Congressional Budget Office say are too deep and simply will not occur.

The uncertainty around the government’s projected cuts means that the deficit will likely rise, Moffit said.

"It’s probably not good news for the taxpayer," he said.

Kevin Hassett, a former senior economist for the Federal Reserve and a budget expert at the American Enterprise Institute, echoed Moffit’s words, saying that entitlements are "exploding in a completely unsustainable way."

According to the GAO’s 2011 report, the Defense Department’s net cost was $718.7 billion, while the Social Security Administration cost $782.5 billion and the Department of Health and Human Services cost $877.1 billion. 

"Simply put, the promised savings of Obamacare have not been realized, and GAO doubts those savings will ever be realized. Ultimately, we need to address entitlement reform," said Rep. Darrell Issa, chairman of the House Oversight Committee.

Issa’s staff on the Oversight Committee noted that the government has never passed an audit, which means that the public does not know exactly how much the government spends or owes.

The inability to audit the Department of Defense’s finances have been a longstanding problem, said Mackenzie Eaglen, a defense policy expert at the American Enterprise Institute.

"This is a problem endemic to the Department of Defense, partly out of its sheer size," she said, noting that the department has two different budgets, one for a standing peacetime force and another for wartime expenditures.

The department has "only made incremental progress over the last several decades," she said.

However, Eaglen said, congressional interest in the budget’s deficit has driven the department to make some progress on readying its financial records for an audit.

The Department of Defense has made more progress over the past five years than it had over the previous several decades, she said, adding that while its accounting is still highly problematic, relative to its past condition the "DOD has made legitimate progress."