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
In this paper, we argue the case for incorporating entitlement debt into the government's debt and deficit measures. Although benefits and taxes can be changed by legislation, measuring and reporting these entitlement debts serves an important purpose. By adding entitlement debt to the government's financial reporting, we get a clearer picture of government's fiscal position at a given time. A total debt figure is more appropriate than the official debt as a measure of the extra tax burden imposed on future generations by government entitlement programs. We have discussed four different measures of entitlement obligations. We have suggested that the concept of "debt" should be restricted to promises made to people currently alive. The 100-year closed-group measure and the accrued liability measure both fit this notion of debt.
However, while the 100-year closed-group calculation identifies the burden that future participants will have to pay, it does not account for the new benefits the future participants will accrue as they pay taxes. The accrued benefit calculation identifies the system's debt at a point in time, but within the context of a pay-as-you-go program, paying off this liability will require tax revenues and concomitant additional benefit accruals. These two measures most closely fit the definition of a debt mentioned at the outset of this paper. However, some have argued that they do not adequately summarize the financial position of generational transfer programs like Social Security and Medicare.
There is a similar problem with the historical use of the 75-year unfunded obligation by Social Security actuaries. These calculations get significantly worse each year because each successive calculation extends the horizon to include one more year of deficit. This year, the perpetuity unfunded obligation is almost 2.5 times the size of the 75-year unfunded obligation.
"The perpetuity measure is important because these programs are very difficult to end."
The advantage of the perpetuity calculation is that it measures the total size of future unfunded obligations, assuming the system is never changed. The calculation is interesting precisely because it is very difficult to end, or substantially change, a pay-as-you-go system. There are legitimate concerns about making estimates that extend into the indefinite horizon. However, these concerns must be weighed against the problems that arise when a shorter horizon is considered. Shorter time horizons, of whatever magnitude, implicitly assume that we can collect taxes in the final year of the period without generating benefit payments the following year.
Together, the four measures provide comprehensive accounting of the current magnitudes of the Social Security and Medicare burdens on current and future generations. They also provide excellent tools for evaluating the generational impacts of reforms that increase or decrease taxes or benefits.
NOTE: Nothing written here should be construed as necessarily reflecting the views of the National Center for Policy Analysis or as an attempt to aid or hinder the passage of any bill before Congress.