U.S. Fiscal Gap Is Unsustainable

February 5, 2014

America's $12 trillion public debt is nothing compared to our country's health care and retirement liabilities, says Veronique de Rugy, a senior research fellow at the Mercatus Center.

Estimates of America's "fiscal gap" -- the difference between the value of our government's future obligations and its projected revenue -- vary:

  • Boston University economist and National Center for Policy Analysis Senior Fellow Larry Kotlikoff calculates the number at $200 trillion. Kotlikoff uses "generational accounting" to reach $200 trillion, calculating what future generations have to pay over their lifetimes to cover the gap.
  • Cato Institute economist Jagadeesh Gokhale puts the number at $54.4 trillion if one assumes that federal laws remain unchanged. If tax and spending policies are assumed to change as they have historically, the gap would be $91.4 trillion. He reaches these figures by subtracting the total present value of projected expenditures and assets from the total present value of projected revenues.

Whatever the number, it is larger than the debt number that we usually see cited. How to fix it? Again, that depends on how it is measured.

  • In the Kotlikoff scenario, all federal taxes would have to increase 54.8 percent, or the United States would have to cut federal spending by 36.2 percent.
  • Using the Gokhale gap, taxes would have to increase by 25.5 percent in the first scenario and by 50.3 percent in the second scenario. Were one to rely solely on spending cuts instead, spending would have to decrease 21.3 percent if the figure is $54 trillion, but 35 percent if the figure is $91 trillion.

In any case, reform is a necessity. The Congressional Budget Office estimates that our debt will reach 200 percent of gross domestic product (up from 73 percent today) by 2038 if this situation continues.

Source: Veronique de Rugy, "America's Crushing Fiscal Gap," Reason Magazine, February 2014.

 

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