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Federal Liabilities: They're Bigger than You May Think

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Federal Liabilities: They're Bigger than You May Think

October 3, 2014

Tracking the federal debt has never been easier. Websites, apps, and billboards provide instantaneous updates of both the debt held by the public, currently $12.8 trillion, as well as the gross debt outstanding, currently $17.8 trillion. The latter includes intergovernmental holdings – primarily comprised of the Social Security Trust Fund. Making sense of the sheer size of these numbers or determining which of the numbers provides the best indication of the federal government debt is no small task.

Let us begin with the $12.8 trillion current debt held by the public. The current debt as a share of the nation’s economy at 74 percent is at its highest level in since WWII. Recent projections from the Congressional Budget Office suggest that the debt will remain at about this share of GDP for the next ten years. 

Is this a problem? It will be if the cost of servicing the debt increases significantly. Even though the debt to GDP ratio is at historical highs the federal government’s real borrowing rate is at historical lows, making debt service manageable. However, even a small increase in the real interest rate will substantially increase interest expenses. There are other less tangible, but just as important, economic costs associated with rising federal debt. These economic costs are primarily in the form of foregone investment in productive capital by government bond holders. 

Further, the debt held by the public is just the tip of the federal liability iceberg. The “official” liabilities of the federal government are presented each year in the Financial Report of the United States Government (FRUSG). The liabilities reported in the FRUSG at this time last year included $12 trillion in debt held by the public, $6.5 trillion in federal civilian and military employees’ accrued pension benefits and other retirement and disability benefits, and $1.3 trillion in other liabilities, producing total liabilities of $19.9 trillion.

Thus, the official federal liabilities are significantly bigger than the debt held by the public, but this measure still does not include a comparable measure for Social Security and Medicare benefits.

Reporting taxpayers’ burdens associated with Social Security and Medicare presents a puzzle. Should the federal government report accrued Social Security and Medicare benefits expected by current retirees and current taxpayers in the same way as it reports federal civilian and military employees accrued retirement benefits? 

The current reasoning is that the federal government should not because Social Security and Medicare benefits can be changed legislatively. Besides, there are already numerous metrics by which we can evaluate the burdens of these transfer programs.

One possible accounting is the aforementioned $17.8 trillion gross federal debt because the gross debt also includes the intergovernmental debts in the programs’ trust funds. However, the securities in the trust funds, while assets of the respective programs, are also liabilities to the Treasury, and offset each other in the consolidated financial statements.

Alternatively, the traditional way of reporting the intergenerational burdens of Social Security and Medicare are based on the programs’ unfunded obligations. The unfunded obligation begins with calculating the difference between the present values of future expenditures and future revenues for a particular time horizon, 75 years or the infinite horizon. The current value for the trust fund partially offsets this amount, producing the unfunded obligation. 

The downside to these calculations is that they are subject to assumptions made about future economic conditions, demographic changes, and in the case of Medicare, the all-important rate of per capita health care spending growth. Further, these calculations assume that the programs continue into the indefinite future and thus include projected payments to and revenues from both current and future participants.

Our emphasis is much simpler and less controversial. We focus on accrued Social Security and Medicare benefits payable to current retirees because they conform to the definition of a liability, are comparable in nature to federal employees’ accrued retirement benefits, and  importantly, are available each year in the FRUSG’s Statement of Social Insurance.

Limiting the accrued Social Security and Medicare liabilities to the benefits payable to current retirees also overcomes the critique that their size can be dramatically changed by legislative action. Most Social Security and Medicare reforms are, at most, a modest effect on current retirees’ aggregate benefits.

 

 

The above figure illustrates the proposed total federal liabilities measure as a percent of GDP from 2000 to 2013. The fact that retirees’ accrued Medicare benefits only declined from 34 percent to 30 percent of GDP between 2009 and 2010 with the passage of the Affordable Care Act illustrates their modest reduction in response to a major reform. In contrast, Medicare’s Part A 75-year unfunded obligation dropped substantially from $13.4 to $2.4 trillion between 2009 and 2010.

The figure also indicates that, prior to the recession, the combined liabilities were 145 percent of GDP and rose to 213 percent by 2013. The increase in the debt held by the public accounts for 54 percent of the growth in the share of GDP from 2007 to 2013 and accrued Social Security benefits of retirees account for 29 percent.

The FRUSG identified liabilities totaling $19.9 trillion as of September 30, 2013. Adding the $16 trillion in accrued Social Security and Medicare benefits payable to current retirees produces a total of $35.8 trillion in federal liabilities. These accrued Social Security and Medicare benefits are larger than the debt held by the public and are 45 percent of the total.  

We have argued that the accrued Social Security and Medicare benefits expected by current retirees provide a conservative estimate of the programs’ commitments that meet the definition of a liability. While they are reported in the FRUSG’s Statement of Social Insurance they deserve added attention as a component of the federal government’s liabilities.

They are also large. Together they exceed the debt held by the public and are 80 percent of the size of the official federal liabilities reported in the FRUSG. Finally, they are relevant to policy makers and the public. These are the benefits on which current retirees rely and retirees are politically motivated to assure that their benefits are not reduced.

 

Liqun Liu is a Research Scientist at the Private Enterprise Research Center and an Adjunct Associate Professor at Texas A&M University. Andrew J. Rettenmaier is the Executive Associate Director at the Private Enterprise Research Center. Dr. Thomas R. Saving is the Director of the Private Enterprise Research Center and the Jeff Montgomery Professor in Economics.

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