NCPA - National Center for Policy Analysis

Focus on Debt Misses $43 Trillion Fiscal Imbalance

July 17, 2003

New record federal deficit projections from the Office of Management and Budget tell us very little about our real fiscal problems -- Medicare and Social Security -- say economists Jagadeesh Gokhale and Kent Smetters.

  • The present value of money that Medicare is projected to pay out for future benefits in excess of its trust fund balance and estimated future tax and premium revenues is $36 trillion.
  • Social Security's imbalance exceeds $7 trillion.
  • Both of these imbalances dwarf the $3.5 trillion currently in publicly held debt.

Congress may be more interested in expanding entitlements than in also proposing real reforms to put both systems on a sustainable course because Congressional Budget Office and OMB reports direct attention to the debt and annual deficits rather than looming fiscal imbalances. This bias policymakers' choices against real reform.

For example, a Social Security system that includes personal accounts financed by a dollar reduction in the present value of future benefits for every payroll tax dollar put in the accounts would increase the federal debt. That is because lower payroll tax revenues will be insufficient to cover payments to today's retirees.

However, the federal government's overall fiscal imbalance will remain unchanged because future Social Security obligations are reduced by the same amount as the debt increase.

And if future Social Security benefits are reduced by a little more than a dollar per dollar of redirected payroll taxes, the government's financial position improves because Social Security's obligations are reduced by more than the increase in debt.

On the other hand, this bias toward the short-term leads policymakers to underestimate the total cost of adding prescription drug plans to Medicare.

The 2003 Social Security Trustees' report includes that program's shortfall through perpetuity. This accounting should be extended to Medicare and the rest of government.

Source: Jagadeesh Gokhale (American Enterprise Institute) and Kent Smetters (National Bureau of Economic Research), "How to Balance A $43 Trillion Checkbook," Wall Street Journal, July 17, 2003; Jagadeesh Gokhale and Kent Smetters, "Fiscal and Generational Imbalances: New Budget Measures for New Budget Priorities," July 2003, American Enterprise Institute.

For WSJ text (requires subscripition),,SB105840770598125100,00.html

For AEI text (free)


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