How Large Is the Federal Government's Debt?

Studies | Federal Spending | Government

No. 263
Thursday, October 30, 2003
by Liqun Liu, Andrew J. Rettenmaier, and Thomas R. Saving


Reporting Entitlement Liabilities

We have discussed four ways to measure the financial status of the Medicare and Social Security programs. The two open-group measures include new participants, those younger than 15, who have not paid any taxes and are not "owed" any benefits, as well as those not yet born. In contrast, both the 100-year closed-group measure and the accrued benefits measure try to identify the net legal commitment to people currently in the system, but they differ in definition. Their difference represents two different philosophies in the accounting profession with regard to measuring liabilities of public pension systems.

"Four measures can be used to evaluate Social Security and Medicare reforms."

Both the 100-year closed-group unfunded liabilities and the accrued benefits meet the criteria that the liabilities are owed to someone who is currently alive today (that is, who is 15 or older).15 Consider these liabilities from the point of view of a beneficiary. To a current worker who stops working and contributing to Social Security or Medicare today, the present value of the retirement benefits the government owes underlies the accrued benefits measure.16 To a current worker who will continue to contribute to Social Security or Medicare until age of 62, the present value of the retirement benefits the government owes, net of the taxes workers are obligated to pay, underlies the 100-year closed-group unfunded liabilities. The difference in the two measures arises in whether we think of Social Security and Medicare as programs that are endable or necessarily ongoing.

The National Council on Government Accounting (NCGA) proposed a measure of pension debt similar to closed-group unfunded obligations, based on the continuation of a public employee's future employment.17 But the Financial Accounting Standards Board (FASB) proposed measuring the rights already earned and ignoring anticipated future accruals.18


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