How Large Is the Federal Government's Debt?
Thursday, October 30, 2003
by Liqun Liu, Andrew J. Rettenmaier, and Thomas R. Saving
Table of Contents
Estimates of the Entitlement Liabilities
The conventional measure of the federal government's outstanding debt is the debt held by the public. This debt includes government bonds held by the Federal Reserve System as well as privately held bonds. Figure I shows this federal debt as a percent of Gross Domestic Product (GDP) for the years 1940 to 2002. For this period, the debt reached its highest level, 98 percent of GDP in 1946. By 1974 it had fallen to 18.2 percent of GDP. It is often noted that the debt grew substantially during the 1980s, climbing from 21.6 percent of GDP to 36.3 percent between 1980 and 1988. However, these figures do not account for changes in the entitlement debt during this period. The total debt burden, including entitlement debt, actually fell during these years due to structural changes in Social Security. Over the remaining years the government debt held by the public topped out at 44.6 percent of GDP in 1993, and by 2002 it stood at 28.4 percent.
Figure II shows three measures of the Social Security system's unfunded obligations relative to the federal debt held by the public for the years 1973 to 2002.4 The 75-year open-group and 100-year closed-group estimates show the effects of legislative changes in 1977 and 1983. Prior to 1983, the 75-year open-group unfunded obligation exceeded the government debt held by the public; from 1983 to 1993, it was less than the government debt held by the public; but from 1994 to the present it was again in excess of the government debt held by the public. Since 1994 the 75-year open-group unfunded obligation has been in the range of 41 to 46 percent of GDP. The 100-year closed-group is consistently larger than the 75-year open-group calculation. In the years since the 1983 reforms, the 100-year closed-group obligation has ranged from 103 to 125 percent of GDP. The final measure of Social Security's obligations depicted in the graph is the accrued benefits measure. Accrued benefits have been calculated since 1996 and have ranged from 118 to 132 percent of GDP. Recall that accrued benefits are based on accruals from the past participation of current workers and beneficiaries and that future payroll tax payments are not subtracted.
Social Security Unfunded Liabilities. In the 2003 Trustees Report, the present value of the difference between the system's revenues and expenditures over the next 75 years is projected to be $4.9 trillion.5 Including the $1.4 trillion trust fund as an offsetting asset, or dedicated funding source, lowers this unfunded obligation to $3.5 trillion. New this year is an estimate of the infinite horizon unfunded obligation. That number is a whopping $11.9 trillion without the trust fund or $10.5 with the trust fund offset.6
Table I identifies the relationship among the four measures of Social Security's unfunded obligations for the year 2002.7 Tax revenues and benefit payments can be divided among three groups: current beneficiaries, current workers, and future participants. Current beneficiaries are individuals 62 years of age and older in 2002, current workers are individuals 15 to 61 years of age in 2002, and future participants are those who in 2002 were under 15 years of age and all those yet to be born. The first row in the table indicates that current beneficiaries have already earned (accrued) the right to collect $4.1 trillion in benefits over and above the taxes they will pay on those benefits. This amounts to $111,286 per beneficiary.
The next row shows that current participants have also already earned the right to $10.1 trillion. Offsetting this figure is $800 billion in taxes that will be paid as the accrued benefits are received, for a net accrued benefit of $9.3 trillion. Summing over those amounts results in net accrued benefits of $13.4 trillion. This is also referred to as the maximum transition cost measure.8
The fourth line shows that current workers will in the future pay additional taxes of $12.3 trillion and earn additional benefits of $10.2 trillion. The combination of the current beneficiaries and current participants form the 100-year closed group. The difference between their taxes and benefits is -$11.4 trillion (line 5).
"Viewed in perpetuity, Social Security has an unfunded liability of $11.4 trillion."
Line 6 shows the present value of tax revenues from and benefit payments for future participants who are not in the system today. As the table shows, taxes and benefits are both equal to $21.6 trillion.9 Thus future workers could pay their own way at the current tax rate and if the taxes were invested. All of the unfunded liability for the Social Security system is associated with the current participants. We should point out that a pay-as-you-go entitlement system that is solvent will always have a significant debt for its closed group. However, in a solvent system, taxes scheduled to be raised from future participants would have a surplus exactly equal to the debt owed to the current participants. With current tax rates and scheduled benefits, future participants' net contribution to paying off the debt of the current generations is essentially zero, and thus they will not provide the needed surplus of $11.4 trillion. Thus, the long-run unfunded liability (the perpetuity calculation) is almost identical to the unfunded liability for current participants (the 100-year closed-group liability).
Medicare Unfunded Liabilities. Table II shows similar calculations for Medicare. The 100-year closed-group Medicare unfunded liability is $13 trillion, the accrued debt is $16.9 trillion, and the perpetuity unfunded obligation is $38.3 trillion.10 Because of the expectation of rising medical care spending, future participants are a significant net burden on Medicare.11 Their benefits will exceed their tax payments by more than $25 trillion. Summing over current and future participants, Medicare debt exceeds the accrued Social Security debt by more than three to one.
Accrued Benefits for Seniors. Although Congress is poised to enact a prescription drug benefit for seniors on the theory that they need relief from the financial burdens of out-of-pocket medical expenses, the reality is that seniors are much wealthier than most people realize. The right to draw Social Security benefits for the rest of their lives is analogous to a private pension. It is an "asset" whose value can be calculated. Similarly, the right to participate in Medicare is analogous to ownership of a private health insurance plan. The value of this "asset" can also be calculated. In general we estimate that:
- For the average senior citizen, the right to continue collecting Social Security benefits for the rest of life is worth about $111,286 in today's dollars.
- The right to participate in Medicare for the rest of life is worth $70,701 for each senior, on the average.
- This means that, in addition to all other assets, the average senior's combined Social Security and Medicare benefits are worth about $181,987.
Total Entitlement Liabilities. Table III combines Medicare's and Social Security's unfunded obligation measures. If we include only payments to current beneficiaries, the debt is $4.1 trillion for Social Security and $2.5 trillion for Medicare. The total of $6.6 trillion is still more than double the size of outstanding government bonds. Including liabilities owed to both current workers and current beneficiaries, on the other hand, the entitlement debt measures are significantly larger:
- The combined unfunded liabilities over the next 75 years are $17.9 trillion.
- Using the 100-year closed-group measures produces debts of $11.4 and $13.0 for Social Security and Medicare, respectively, for a total of $24.4 trillion.
- Using the accrued liabilities measure produces a $13.4 trillion debt for Social Security and a $16.9 trillion debt for Medicare, for a total of $30.3 trillion.
- Finally, the combined perpetuity unfunded obligation is $49.6 trillion, with Medicare accounting for more than three-fourths.
While these estimates may appear startling, other authors have estimated perpetuity shortfalls of similar magnitude. Recently, Gokhale and Smetters12 estimated that Medicare and Social Security combined produced a shortfall of $43.6 trillion dollars in 2002, when all future dedicated revenues and benefit payments are considered. Including the rest of the federal government, they estimate the total federal fiscal imbalance at $44.2 trillion.13 In a similar vein, Auerbach, Gale and Orszag (2003) have calculated a long-term fiscal gap of $59.7 trillion.14 [See Figure III.]