The report is here. It looks interesting, but I find it difficult to parse. Liqun Liu, Andrew J. Rettenmaier, and Thomas R. Saving parse it this way:
The liabilities reported in the FRUSG at this time last year included $12 trillion in debt held by the public, $6.5 trillion in federal civilian and military employees’ accrued pension benefits and other retirement and disability benefits, and $1.3 trillion in other liabilities, producing total liabilities of $19.9 trillion.
They point out that the liabilities for Social Security and Medicare seem suspiciously small, because the report acts as if these could be erased quickly with the stroke of a (legislative) pen. Technically, that is true, but realistically it is not. Instead, Liu, et al, propose to include benefits payable to current retirees.
Adding the $16 trillion in accrued Social Security and Medicare benefits payable to current retirees produces a total of $35.8 trillion in federal liabilities. These accrued Social Security and Medicare benefits are larger than the debt held by the public and are 45 percent of the total.
Pointer from James Pethokoukis.
This is still not very satisfying.
1. The liabilities to pay benefits to those of us not yet eligible ought to be included.
2. If we are going to include future government expenditures as liabilities, then we ought to include future tax revenues as assets.
3. We ought to use a discounted present value concept, rather than treat dollars that will be spent or received 10 years from now as equal to dollars that will be spent or received today.
Conceptually, I believe that what we want is a present discounted value of assets (including future tax revenues) and liabilities under current law (or what CBO projects law to be under its more-plausible “alternative scenario”). You can then look at the change in these values from year to year as an accrual-accounting measure.
I agree. Actual ballance sheet showing assets and liabilities discounted for present value, Assuming an honest one could be obtained, might drive a more constructive discussion of government spending and priorities.
We use Net Present Value to evaluate the feasibility of an investment project. Should it be applied to the finances of the world largest economy?
“2. If we are going to include future government expenditures as liabilities, then we ought to include future tax revenues as assets.”
So, should a business which will have to make expenditures to meet its liabilities project its current revenues and treat that projection as an asset?
The concept reflected in 2. changes the assigned meaning of “liability.”
If we were to be testing for something called “liquidity” then that concept might have application.
Taxes are somewhere between assets and business-derived expected revenues because of the government’s power.
But it really doesn’t matter what you call it.
The point is any fair appraisal of the government’s future financial position has to consider the plausible cash flows in and out. If there are persistent shortfalls (which seem practically guaranteed) then the question is whether debt-financing is expected to remain sustainable and affordable, even in the case of a variety of economic stress events, and without requiring a severe and radical adjustment of policy.
If any U.S. government financial report doesn’t make the point of that kind of adjustment being a near certainty as a result of the profound disconnect between taxing and spending as the population ages, then it isn’t worth the paper it’s printed on.
Arnold, your technique for estimating the net liability is close, but not quite accurate. This bridge has been crossed before in the form of FAS 87 – Employers’ Accounting for Pensions. Basically, you want to include the present value of the future payouts to Social Security and Medicare beneficiaries, but only to the extent that these people stopped working today, and then coasted to retirement. Similarly, you do not want to include the present value of tax receipts. If you did, that would be similar to a company projecting out its future revenue, discounting that revenue to today, and placing a value on it. The point is, you want to discount all the future cash flows that specifically relate to events that have already occurred, and not which may occur.
Regarding FAS 87, I realize that accountants methodologies are often flawed, and also the results of the analysis are very dependent upon the assumptions regarding discount rates, etc. Nevertheless, I think the analysis in FAS 87 regarding which future cash flows to include, and which to exclude, is applicable to this situation.