Social Security and Medicare

I am currently taking a financial statement analysis course, which covers a number of accounting issues that have wider implications in the economy. The adjustments to property, plant, and equipment, leases, inventories, and pensions are made by financial analysts to get closer to economic reality and the prospects of a company. With current payroll taxes and benefit schedules, there is a substantial unfunded liability that is not included in the national debt. If believe the numbers, either taxes need to go up or benefits must be reduced.

The early recipients of social security received much more than they paid into the system. When there was a huge number of works for every retiree, there was no problem with this model. However, the population is aging and fewer workers support each retiree. The excess paid to early recipients will catch up with us, and somebody has to pay in reduced benefits or increased taxes.

Under GAAP standards, the obligations of the federal government are several times the official national debt. While I'm not in the business of predicting a collapse, I have to wonder who is going to buy the bonds of such a leveraged country going forward.

A Problem Made For Bankruptcy

There is a set of laws already in place to deal with GM's bondholders, suppliers, unions, and anybody else who has a claim on the company's assets. The bonds are widely held, there are many suppliers and other obligations. In order to get all of these constituencies to the table, the bankruptcy court is the best way to settle it. The court would follow established precedent and priorities to pay out claims or reorganize the company rather than a popularity contest playing to political concerns. A successful bankruptcy reorganization will result in:

1. Creditors paid in a fair and equitable settlement in accordance with absolute priority. The ones that will make "sacrifices" will always be the ones with lower claims.
2. GM going forward with a less burdensome debt enabling the company to compete better with other automakers.

Bankruptcy allows the creditor classes to vote(1/2 in number and 2/3 in amount) on a plan that is binding to all parties, effectively solving the holdout problem. Even if a class holds out, a bankruptcy plan be crammed down.

Chapter 11 was designed to force all the claim holders together and giving nobody what they want. That's what GM needs to move on.