NCPA - National Center for Policy Analysis

Current Cost of Unfunded Future Spending: $38.1 Trillion

September 4, 2003

The future will be expensive to fund, say Jagadeesh Gokhale and Kent Smetters. The researchers estimate the present value of total future federal debts at $38.1 trillion. This is the amount that the federal government must have available today to invest with interest to make current policies sustainable -- and Medicare and Social Security will account for almost the entire projected shortfall.

Given that the federal government does not possess an extra $38.1 trillion in interest earning assets, however, it must raise much more by increasing future tax revenues and/or cutting future spending.

According to Gokhale and Smetters:

  • Social Security's unfunded liabilities are about $7 trillion in present value. [See the Figure.]
  • Medicare's projected shortfall is $30.5 trillion -- of which Part A (the Hospital Insurance program) contributes $14.4 trillion and Part B (the Supplemental Medical Insurance program) contributes $16.1 trillion.
  • By contrast, the rest of the federal government's fiscal imbalance is only $0.5 trillion, including trust fund surpluses and the publicly held debt.

To close the fiscal gap under current law now would require a permanent 14.4 percentage points increase in payroll taxes, invested in securities paying a real return of about three percent per year. Alternatively, income tax revenues would have to be hiked immediately and permanently by 59.1 percent -- increasing their share of gross domestic product (GDP) from 9.5 percent to 15.1 percent.

Adding an unfunded Medicare prescription drug benefit, as proposed by the Senate, could add as much as $12 trillion to the fiscal imbalance -- increasing unfunded federal liabilities to more than $50 trillion.

Source: Jagadeesh Gokhale and Kent Smetters, "Piling Up Future Debts," Brief Analysis No. 453, September 4, 2003, National Center for Policy Analysis.

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