America’s Hidden Credit Card Bill

Laurence Kotlikoff: The Government Should Report Its ‘Fiscal Gap,’ Not Just Official Debts

From  The New York Times

July 31, 2014


BOSTON — HOUSEHOLDS can’t spend, on a continuing basis, more than they earn. Countries can’t either, at least not over the long run. But countries can certainly leave the bill for their current spending to the young and to future generations. Official borrowing is the old-fashioned way to do this: Sell Treasury bonds, and other securities, and spend the proceeds. But borrowing in broad daylight has a drawback: The more you do it, the more lenders worry about repayment, and the more interest they charge for their loans.

So there’s a different way to borrow — one that’s more subtle, harder to see and, therefore, cheaper to do. You still take in money, pledge to return it, and leave future generations on the hook. But you call the money you take in “taxes,” not “borrowing.” And you promise repayment in the form of pension, health care and other benefits, but you don’t record the present value of those promises as official debt.

Social Security is a prime example. It takes in money, via payroll taxes, while promising hefty retirement benefits in return. Dig deep into the appendix of the most recent Social Security Trustees Report, released on Monday, and you’ll find that the program’s unfunded obligation is $24.9 trillion “through the infinite horizon” (or a mere $10.6 trillion, as calculated through 2088). That’s nearly twice the $12.6 trillion in public debt held by the United States government.

Social Security is backed by something perhaps even more powerful than the full faith and credit of the government: the political power of some 100 million Americans 50 and older.

My 94-year-old mom is in this demographic. She’s collecting Social Security retirement benefits based on her 35 years of payroll tax payments, first as a university administrator and then as a printing broker. She’s also receiving widow’s benefits based on my dad’s 30-year work history at Kotlikoff’s, the department store in Camden, N.J., that he owned with his brothers.

Every month, my mom receives a yellow and green benefit check for $1,600 from the Treasury. I expect she’ll keep collecting those Social Security checks for a long time. She’s crushing 50-year-olds at bridge and doing yoga. Apart from their amount, the checks look identical to the $400 checks she receives every six months on her small remaining holdings of Treasury bonds. Yet Uncle Sam’s obligation to send her the $400 checks is recorded on its books, whereas his obligation to send her the $1,600 checks is not. (I’m 63, but not collecting benefits yet.)

True, Social Security benefits could be cut by Congress and the president. But so can official debt, as Argentina’s likely default reminds us. The prospect of formal default by the United States is remote. Informal default via the inflationary, easy-money policies of the Federal Reserve since 2007, is more likely. (Social Security is pegged to inflation, so while inflation would help with our official debts to creditors, like China, it is far from a panacea.)

Social Security’s hidden debt is just a small part of the story. Two weeks ago, the Congressional Budget Office released its annual long-term budget outlook. The good news: This year’s deficit — about 3 percent of gross domestic product — is the smallest since 2007 and way down from the peak of almost 10 percent in 2009. The bad: Without action, the deficit will grow “notably larger” starting in about four years, a result of our aging population, rising health costs and the new subsidies for health insurance.

Even worse, the budget office raised what’s called the alternative fiscal scenario, the most realistic projection of fiscal outcomes absent major policy changes. Based on these estimates, I calculate that the “fiscal gap” — a yardstick of total government indebtedness that I’ve worked on with the economists Alan J. Auerbach and Jagadeesh Gokhale — was $210 trillion last year, up from $205 trillion the previous year. Thus $5 trillion was the true deficit…


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