A Primer on our Liability

2010 July 11
by SJ Leeds

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I’ve received loads of emails from people who are happy that the blog will be focused on the long term issues.  That’s great.  (Of course, I’m not sure that the people who are unhappy will bother writing me!)  I’m going to try to break some of the blogs into pieces – so that they don’t take you (or me) too much time.  In other words, I hope that they are easier to digest.

Today, I want to explain the $52 trillion unfunded liability that I always mention.  It turns out that I was wrong – as of this past year, it was probably $49 trillion.  But, we’ll see (later this week) that it’s higher!  Before we get to that issue (tomorrow), I want to show you where the numbers come from and also show you the discrepancy (I wasn’t looking at the unfunded liability, I was looking at the net liability – a very small difference, but one that I want to correct).

Every year, the Treasury Department puts out a report that turns the government’s financial statements into an accrual basis (rather than a cash basis) and makes them more like the financial statements we’re used to seeing (in corporate America).  The most recent one is titled “The Federal Government’s Financial Health: A Citizen’s Guide to the 2009 Financial Report of the U.S. Government.”  (Here’s the link if you want to see it.)  One of the things that you can find in this report is a description of the liability for the following programs:

1. Social Security

2. Medicare (Parts A, B and D)

3. Railroad Retirement (very small)

4. Black Lung Fund (tiny)

For each of the programs, the report describes the present value of the revenue that will come into each fund (in the future) and the present value of the payments that will go out of each fund.  More interestingly, they break the revenue and liability down into three components for each fund (other than Black Lung):

  1. the amounts related to people who have already attained eligibility for the program (62 and over for Social Security, 65 and over for Medicare)

  2. participants who have not yet attained eligibility (e.g., people who are working and contributing, but they can’t claim benefits yet)

  3. 3. future participants

When the government (and the Trustees of each fund) calculates these numbers, they plan 75 years out.  So, “future participants” (Category 3) are people who are not working yet, but will start working in the future.  (This is a key idea that I’ll come back to…you’re getting excited aren’t you?)  Many of these future participants haven’t been born yet…some will be the children of our children.

Categories 1 and 2 (people who have already attained eligibility and people who are participants but have not yet attained eligibility) are combined and called “the closed group.” When group 3 (the future participants) is included, it’s called “the open group.” Again…this is going to be important both today and later this week.

Here are some interesting things you should know:

  1. The present value of the liability (in excess of the present value of the revenues) is $52 trillion for the closed group.

  2. The way we get to the $52 trillion is $32 trillion of revenue and $84 trillion of liability.  This is amazing.  It would be one thing to be $52 trillion short on a $900 trillion liability.  But, we’re $52 trillion short on an $84 trillion liability!

  3. In the past, I have mistakenly referred to this as our unfunded liability of $52 trillion.  This is wrong. As I’ve had more time to review the numbers, this number ($52 trillion) does not include the money already set aside (the well-known “lockbox”).  We actually have close to $2.8 trillion set aside.  So, you could make a reasonable argument that the unfunded liability is really closer to $49.2 trillion. It’s not a huge difference, but I’ll try to use the correct numbers.

  4. While I will sometimes talk about the $49.2 trillion unfunded liability in the future, make sure you realize that this $2.8 trillion has been loaned to the US government (and spent).  The trust funds have IOUs in their “lockbox.”  In other words, the federal government has spent the money and promised to pay it back to the Social Security fund.

  5. Assuming we don’t cut Social Security benefits, since we’ve already spent the “trust fund money,” these funds will have to be replaced.  This $2.8 trillion will come out of our General Fund (in the future) or we’ll have to borrow the money.  Since I’m not expecting the Surplus Fairy to arrive anytime soon, we’ll have to increase our debt by $2.8 trillion.  In other words, Social Security (and other funds) is currently financing our government’s past deficits (by loaning the trust fund money to the government).  Those loans will have to be replaced…someone get China on the phone.

  6. Our current debt outstanding to investors (not including the Trust Funds) is approximately $9 trillion. (When you include the trust funds and other government agency loans, our total debt is $13 trillion and rising.)  So financing this $2.8 trillion is going to be significant (ignoring all other annual deficits that cause us to issue more debt).  In other words, it’s hard to believe that the credit markets are clamoring for a 50% increase in the amount of Treasury bonds outstanding (if you look at the entire $4 trillion loaned by trust funds and other government entities).  This will happen during the next 20 years (approximately).  (Of course, issuance will increase much more because of other problems.)

  7. Here’s something that’s really interesting…while the net liability is $52 trillion for the closed group, it is only $45 trillion for the open group. THIS IS REALLY INTERESTING…when we include future participants, it seems like we solve a bit of the problem.  As Lee Corso says, “not so fast my friend!”  This is a really interesting issue and will be the focus of another blog this week.  It leads to an interesting conclusion.

So, in the interest of keeping this short, let me show you the net liabilities of each of the Funds.  I’m going to use the open group (and the $45 trillion net liability):

Social Security -$7.7 trillion

Medicare Part A -$13.8 trillion

Medicare Part B -$17.2 trillion

Medicare Part D -$7.2 trillion

Railroad Retirement -$100 billion (this is relatively small)

Black Lung $6 billion (surplus)

NOTE: Railroad Retirement and Black Lung are in billions while everything else is trillions.

In conclusion, we have a huge liability. You see that this appears to be largely a Medicare problem.  Tomorrow, we’ll see that this is a little misleading. Social Security is actually a very significant problem.


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