Yesterday’s Wall Street Journal carried an article calculating the federal government’s liabilities at approximately 550 percent of GDP:
The actual liabilities of the federal government—including Social Security, Medicare, and federal employees’ future retirement benefits—already exceed $86.8 trillion, or 550% of GDP. For the year ending Dec. 31, 2011, the annual accrued expense of Medicare and Social Security was $7 trillion. Nothing like that figure is used in calculating the deficit. In reality, the reported budget deficit is less than one-fifth of the more accurate figure.
Why haven’t Americans heard about the titanic $86.8 trillion liability from these programs? One reason: The actual figures do not appear in black and white on any balance sheet. But it is possible to discover them. Included in the annual Medicare Trustees’ report are separate actuarial estimates of the unfunded liability for Medicare Part A (the hospital portion), Part B (medical insurance) and Part D (prescription drug coverage).
As of the most recent Trustees’ report in April, the net present value of the unfunded liability of Medicare was $42.8 trillion. The comparable balance sheet liability for Social Security is $20.5 trillion.
The authors are Chris Cox and Bill Archer, former Congressmen (Republicans pitched out by voters angry about hearing the bad news?). They say that the federal government will need an additional $8 trillion per year in tax revenue in order to stay current with accrued costs. In 2011 the federal government collected just $2.2 trillion in total taxes, so we all need to be paying roughly 4X what we currently are.
I’d previously seen a New York Times article calculating our debt at 500 percent of GDP, but I’d thought that it included liabilities of the 5o states as well as the federal government. If Cox and Archer are right, the Federal government owes 550 percent of GDP and state pension and retiree health care liabilities will be additional. The states’ liabilities are plainly enormous, with government workers here in Massachusetts retiring as young as age 41 and 51-year-old retirees in California receiving more than the U.S. Secretary of Defense. Maybe nobody knows the real number?
Perhaps this is a big source of political disagreement in the U.S. Half of the voters look at the cash books, which show that we’re spending only $1-2 trillion beyond our means every year, a cruel burden for our children and grandchildren. The other half of the voters look at the accrual books, which show that we’re spending closer to $10 trillion beyond our means every year, an impossible burden for our children and grandchildren.
I think the real source of political disagreement is that everybody knows a huge bill is coming but we can’t agree on who should have to pay it. Some people think “I’ve played by the rules – went to college, worked a difficult job, saved my money, paid down my debts. Don’t come after my wealth to pay the bill.” Others say you can’t possibly expect those without any means to have to pay the bill (or suffer reduced benefits) because that would be cruelest to those who are worst off to begin with.
These facts have been known for awhile. Today I think the question is can the US possibly avoid financial collapse? I don’t think it can. I wonder whether the US government will survive financial collapse and what will come after if it cannot.
Still very relevant:
http://www.nytimes.com/2012/01/02/opinion/krugman-nobody-understands-debt.html
According to the latest report, total unfunded liability of Medicare is 5.3 trillion, not 42.8 trillion as article quotes (see page 244 of report). Perhaps, I’m missing something obvious?
https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/Downloads/TR2012.pdf
Stein’s Law: “When something cannot go on forever, it will stop.”
Perhaps you should meet with the author of “Dr. Housing Bubble”, who posted articles for years and years of articles with pictures of tiny shacks in dangerous neighborhoods selling for $500k to minimum-wage workers. It was a bubble, it did pop, and the perps made their billions in the good times and got their bailouts in the bad times and Joe Taxpayer got the bill.
Members of the 25% federal tax income brackets will find 4x a very interesting number.
What is the net present value of the expected GDP over the period of time for which these liabilities are calculated?
Phil,
This shouldn’t be a problem if we just listen to Warren Buffett. You know, the super-rich guy who time after time in his biography (The Snowball: Warren Buffett and The Business of Life; written by Alice Schroeder) tells of his own prowess in tax avoidance yet now says all us rich folk ($250,000 in annual income) should welcome the chance to pay “our fair share”. !!
One would think a newspaper as dedicated to the truth as one New York Times would do their own head scratching at a person (Buffett) who is guilty of such blatant hipocracy that it’s able to be detected by even a dumb Southern Baptist conservative like myself.
It’s difficult to get a non-partisan picture of what these numbers really mean.
I looked at Medicare Trustees’ report – http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/Downloads/TR2012.pdf
For one thing, it looks like these are 75-year projections, and I don’t really know what to make of projections that far out. It’s hard to believe that very many of the assumptions in the estimate will hold for that long. It might be prudent to worry about, but it’s not quite a crisis on the basis of a long term projection with that many open variables.
It might make more sense to worry about 20 years from now, but I don’t see those numbers in the report. Medicare is apparently supposed to remain solvent for another 12 years or so.
Interestingly, it says that for certain parts of Medicare “Under a literal interpretation of current law, payments would be reduced to levels that could be paid from incoming tax and premium revenues
when the HI trust fund was depleted,” but the whole report would be pointless if they didn’t say how much more money Medicare needs to keep paying as it does today, so they give these huge numbers. This basically means that it’s not debt – the law actually says Medicare will not go into debt; it’ll just be much less useful to everyone than it is now.
I might also cynically guess that if Medicare stops paying, Social Security will become a lot cheaper to run.
The real question behind the number is what the real world consequences will be, and what difference will there be in addressing the issue now versus once a crisis has already begun. It is almost impossible to use normal intuition to predict the answers – for instance, it’s possible that it’s a good (read: evil but prudent) idea to spend a lot of money on infrastructure now, then when crisis hits, default on all the debt, and then stop paying for roads which have already been upgraded and start paying exclusively for Medicare and Social Security. Who knows?
The article only considers certain government programs. The Dept. of Defense represents a significant portion of the federal budget. As good Republicans, the authors would certainly want very high military spending to continue indefinitely. Someone could probably estimate the net present value of future DOD spending. It would probably represent a liability of many trillions of dollars. Since the armed forces don’t have a dedicated source of funds like Social Security and Medicare, that liability would be completely unfunded.
So why do the authors not consider that category of spending? Republicans sometimes seem to think that the DOD is not part of the government.
Phil, that NYT article seems to be talking about federal debt: “Mr. Gokhale has done a similar calculation for the United States and estimates that the truest measure of federal government debt, incorporating Medicare, Medicaid, Social Security and other obligations, is $79 trillion, or about 500 percent…”
Since that article is 2 and 1/2 years old, perhaps the 500% has grown to 550% now.
Phil:
If these liabilities are mostly due to Medicare, Social Security, and Pensions, then that would mean that the debt would be denominated in US Dollars. As the sole entity in the world that can legally print US Dollars, what’s to prevent the US government from just printing more money and “inflate” its way out of this situation?
On a more practical level, faced with this situation, what’s an individual tax payer to do? Seeing how the political establishment is either incapable, or unwilling to deal with this problem, should we stay and pray, or pack our bags and move to greener pastures(Singapore, Canada…)?
It is simply incredible that people don’t even react any more when they hear these kind of numbers. Just stop for a minute and think, 86 trillion !? 550% of GDP !?
How far do you think this can go, sooner or later this kind of debt will mean that you can not kick the can down the road any more. There has to be an end.
The authors are Chris Cox and Bill Archer, former Congressmen (Republicans pitched out by voters angry about hearing the bad news?)
Nope. Appointed from Congress by Bush to the Chair of Securities and Exchange Commision in 2005, regulating Wall Street until 2009
@Bob Oppenheimer, I think you are right, the solution to the debt and unfunded liability problem will be inflation.
As to what an individual tax payer should do, I say vote for the candidate who promises to raise taxes and reduce government services.
“The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.”
… except it’s not actually the public’s money, it’s debt to a private bank consortium, right?
I’d like to have Neal’s question about net present value of the GDP on this. Lawrence suggests that these numbers are over 75 years?
When I bought a house for mumbledy hundred thousand bucks, I was mixing conslutting 1099 income with some W2 income, and only stated the W2 income on my mortgage application. I had no problem accumulating 525% of my stated domestic product on a 30 year fixed mortgage at an absurdly low rate, and in fact the budget numbers pencil out just fine for that.
So, yeah, the numbers are meaningless. thrown up without context for emotional reaction, not actually useful data for people trying to make informed decisions.
Now add on the costs of dealing with adapting to climate change.
Don’t they teach math at MIT these days?
When I was in grad school I was told to watch out for any calculations that have an exponential character because ultimately these diverge and produce invalid results. For instance, if the Indians who sold Manhattan had put their money in hedge funds they’d now have enough money to buy a Dyson sphere, stuff like that.
The “present time value of money” is a concept that’s not really valid over time scales greater than 20-30 years because the assumptions behind the discount rate will change. In calculations of this sort you can get your choice of outrageous numbers to publish just by changing the discount rate you use.
Exponential factors in health care costs will also explode Medicare. The way things are going it will someday cost 2 years pay to get an annual check up, so you know things can’t keep going that way.
More to the point, even though 5x GDP is an eye-popping number, there is the question of the time scale involved. I mean, if we go indefinitely in the future, we could say that our future debt is infinite. The actual size of this number is a function of how we chop this off, and it’s a very sensitive number.
If we had to pay 5x GDP in one year than yes that’s a problem. If we have to pay 5x GDP over the course of 75 years then that’s a substantial amount of money but it’s just 6% of the GDP per year and should be very possible to find the money for. (Long before the mortgage crisis, it was considered prudent lending to give people a mortgage for a multiple of their annual salary.)
Numbers like this are used to manipulate people emotionally. Last year no-nukes were going around saying it would cost the U.S. $100 billion to dispose of nuclear waste over the next 100 years. Sounds like a disaster, eh? Well the nuclear industry produces about $50 billion in electricity a year, so it produces that much value in just 2 years. It’s a significant number, sure, but it’s entirely deceptive about the real economic issues that confront nuclear energy.
Paul: Perhaps it is possible to show by mathematical argument that there is no difference between a government that spends more than it collects in taxes (e.g., U.S., Greece, Spain, et al.), thereby accumulating debt, and a government that spends less than it collects in taxes (e.g., Singapore (see http://ideas.repec.org/p/sca/scaewp/0704.html )), thereby accumulating a sovereign wealth fund. Then the only logical conclusion would be that people who live in Singapore are stupid. They could spend another 20-30 percent of GDP every year and enjoy a more lavish lifestyle if only they understood that deficit spending entailed no consequences. The Greek/California government worker/General Motors model of retiring at age 50 yields just as much economic growth as a system in which workers retire at 65 or 70.
[I don’t think that normal market arguments can be made regarding Medicare or health care in general in the U.S. Certainly 40 years ago nobody would have believed you if you’d said that the U.S. would one day spend 20 percent of its GDP on health care. Yet we do. So why not 30 or 40 percent? In a market environment, Americans would consume many fewer health care services domestically. An American who was well enough to walk into an IVF clinic, for example, would instead walk onto an Airbus A380 and pay for a lovely vacation in a country where IVF could be done at a tiny fraction of the U.S. cost (I recently heard about some folks whose insurance wouldn’t pay for IVF so they flew from Kentucky to Eastern Europe saved thousands of dollars even after the cost of airfare and luxury hotels).]
Phil,
Paul’s point is entirely correct that NPV like any exponential function is wildly sensitive to the discount rate, but Which one do you use over 75 years?
You are trying to dismiss Paul’s argument a little too glibly by bringing up US, Italy and Spain and comparing to Singapore as of today.
Spain was running roughly balanced budget or better from 2001-2005 (-0.5% to +1.9%) which was about +4.5% better than Germany which was spending more than bringing in. Before that Spain’s budget balance was roughly equivalent to Germany’s. In 2009 Spain’s deficit was -12%.
Ireland was spending less than it collected for a decade (up to 5% surplus) before the crisis and then had a -30% deficit in 2010, by taking on their banks’ debt.
US was running surplus in the 90s
Singapore was spending more than they collected in taxes for 11 out of the last 22 years or so, Singapore’s debt/GDP is double that of Spain… And 75 years ago Singapore’s (Malay) economy, theretofore quite prosperous for a while, was suffering a horrendous crunch since the only thing they produced was Rubber and Tin, and the Great Depression meant their exports were falling something like 80%. So I guess that makes Singaporeans must be stupid.
Our children will never pay that debt, because we live in a democracy, and any politician that expects them to pay it will find himself looking for a new line of work. One way or another, most likely through inflation, the creditors are the ones who are going to lose. Read “This Time Is Different” by Ken Rogoff – sovereign default happens all the time, usually without consequences as dire as you might think.
The real consequence will be that the government will have to balance the budget afterwards, assuming nobody will be stupid enough to buy debt from a government that just defaulted, meaning tax increases and belt tightening that will probably have to touch sacred cows like social security.