How Large Is the Federal Government's Debt?
Thursday, October 30, 2003
by Liqun Liu, Andrew J. Rettenmaier, and Thomas R. Saving
Table of Contents
What is a debt? Most people have financial debts such as mortgages, credit card balances, and car loans. They may also have financial debts owed to them in the form of certificates of deposit or corporate bonds. All these debts have two critical features: (1) they are owed to an individual or business, and (2) they represent an obligation to pay that is enforceable in a court of law.
The federal government also has debts. Like private debts, there are bonds held by the public and by foreign investors. But unlike private debts, there also are promises to pay such benefits as Medicare and Social Security. Should these commitments count as part of the government debt? On the one hand, the government's promises to pay Medicare and Social Security benefits are not enforceable in a court of law. Future Congresses can revoke the promises of past Congresses. On the other hand, workers and retirees have changed their savings behavior because they expect to receive Social Security and Medicare. They are thus acting as if they have an implicit bond from the federal government. This is one reason why breaking such commitments is very difficult.
There has been significant interest in recent years in accounting for the size of Medicare and Social Security obligations, both within government agencies and among academics.1 While a number of federal publications report measures of Social Security and Medicare obligations, they do not report them as debt. The reason why is summarized in the accompanying sidebar on the "Official Rationale." While Social Security and Medicare benefits are considered "obligations" of the federal government, according to the reasoning, they are not considered "liabilities" because the government can unilaterally increase or decrease those benefits. However, the fact that the government can alter its promises to future retirees does not mean that the unfunded obligations should not be reported as liabilities.
In this paper we propose adding Social Security and Medicare entitlement commitments to the federal government's balance sheet as debts on par with the debt held by the public to arrive at what we call the total debt. We argue that this comprehensive debt represents a more accurate measure of the extra tax burden on future generations than the official debt.2
Although the terms deficit and debt are often used interchangeably, they measure different things. As a public accounting convention, the deficit measures yearly increases in government borrowing, while the outstanding debt is accumulated government borrowing. Because government budgeting is so complex, and economic activities are by nature multidimensional, the appropriate measure of the government's deficit or debt at a given point in time depends in some ways on the context in which the measure is being used. [See the sidebar on "The Need for a Comprehensive Measure of Debt."]