Are Unfunded Liabilities Part of the Public Debt?

Mish recently wrote this:

The Chicago Tribune had an excellent set of charts this weekend in A Tsunami of Red Ink regarding US government debt and who owns it, and also a comparison of US debt to the national debt of other countries.

Debt as a Percentage of GDP

Comparison of US Debt to Other Countries

Click on the link at the top to see foreign holders of US debt country by country. The top three US debt holders are China, Japan, and the UK.

Some will not believe those figures on debt to GDP comparisons. I don’t either. For starters the numbers are from 2009.

The footnote also says, if intragovernmental debt is included the figure is 83%. That number is approximately correct in my opinion (as of 2009).

Some will want to count unfunded Social Security and Medicare liabilities out to 2050 or whatever. This is simply wrong. That would be like counting a car you intend to buy 3 years from now as part of your debt now.

Many things can happen between now and then.

  • You may buy a smaller car.
  • You may not buy the car at all, opting for public transportation.
  • When the time arrives, you may postpone buying a car for a couple more years.
  • You may save enough to pay for the car in cash so that you incur no debt.

Likewise, the plans for Social Security and Medicare might change. Costs may go up, or down. The plans may be scaled back by the next generation of US citizens who think our generation was the most greedy in history.

The first part of the article is informing and interesting, the second part is rather questionable. In particular this statement makes very little sense:

Some will want to count unfunded Social Security and Medicare liabilities out to 2050 or whatever. This is simply wrong. That would be like counting a car you intend to buy 3 years from now as part of your debt now.

Not so much! A car I intend to buy 3 years from now is not a commitment made by anybody towards me or from me towards anybody. It does not have any contractual character. It contains no financial obligations whatsoever.

As I explained before:

Then there are unfunded social security and medicare obligations of about $43 trillion according to the Treasury’s own Financial Report for 2008:

The SOSI provides additional perspective on the Government’s long term estimated exposures and costs. However, it should be noted that the Government’s financial statements do not reflect future costs implied by any current policy, such as national defense, the global war on terrorism, and disaster relief and recovery. Table 3 shows the Government’s estimated present value of future social insurance expenditures, net of dedicated future revenues for the programs reported in the Statement of Social Insurance (SOSI), projected to be $43 trillion as of January 1, 2008 for the ‘Open Group’6. While these expenditures are currently not considered Government liabilities, they do have the potential to become liabilities in the future, based on the continuation of the social insurance programs’ provisions contained in current law.

A liability, or debt, is simply “the obligation of one person or group to provide future goods to another person or group.” Thus, for the discerning economist, it is rather irrelevant if the government “considers” or “officially calls” them liabilities. As far as their impact on human action is concerned, and thus all that economics cares about, they are debts. This brings the total US debt up to around $93 trillion (with total public debt at around $54 trillion).

All the arguments Mish advanced against including unfunded liabilities could just as well be advanced against including any public debt outstanding. The government doesn’t have to honor the public debt. It could also decide to “take public transportation” in that sense and “not buy a car” by not paying off its creditors.

It may be accurate to say that a partial default on unfunded Medicare and Social Security liabilities will be a lot less eye catching and PR laden than one on the official public debt floating around. But that doesn’t mean that it won’t have major effects on people’s behavior in society. It also doesn’t change its fundamental praxeological character. One need only look at the current madness unraveling in the field of public sector unions and public pensions to appreciate this fact. (This is one more reason why I am surprised that someone like Mish brushes over the phenomenon of unfunded federal government obligations so cavalierly and suggest that they not be considered public debt.)

In fact, I believe that the first wave of public debt defaults will occur silently in the realm of those unfunded, off-balance-sheet liabilities, just as it has recently been happening in Greece.

A public debt is any monetary commitment that future taxpayers have been put on the hook for, thus there is absolutely no difference in kind between commitments to pay money to a Treasury Bond investor over 30 years, and commitments to pay money to Social Security or Medicare Recipients over the years to come.

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Deflation Reaches Social Security Administration; No Cost of Living Increases in 2010

Since overall prices declined throughout 2009, the social security administration announced that there will be no cost of living increases for recipients next year:

The Social Security Administration makes it official Thursday: There will be no cost of living increase for Social Security recipients next year, the first year without one since automatic adjustments were adopted in 1975.

The announcement comes as President Barack Obama and key members of Congress call for a second round of $250 payments to more than 50 million seniors, veterans, retired railroad workers and people with disabilities.

The payments would be equal to about a 2 percent increase for the average Social Security recipient. The cost: $13 billion.

Obama called on Congress Wednesday to approve the payments, and several key members of Congress said they would.

“This additional assistance will be especially important in the coming months, as countless seniors and others have seen their retirement accounts and home values decline as a result of this economic crisis,” Obama said in a statement.

Blame falling consumer prices for no automatic increase next year. By law, Social Security’s cost-of-living adjustment, or COLA, is pegged to inflation, which was negative this year, due largely to falling energy costs.

This announcement marks a seismic shift in attitudes. “Inflation adjusted” has become “deflation adjusted”. Market participants have noticed this a while ago, but until today it had not yet reached such high government offices as the SSA.

Don’t get me wrong. Of course payments won’t drop outright for the time being. But how many people had expected these upward adjustments to keep going on as they always have? I think quite a lot. What are the implications on the net present value of all unfunded public liabilities? These liabilities are of enormous importance when it comes to getting an accurate picture of the amount of money owed in the US economy. Just one little change such as dropping COLA for even just one year can have vast implications on household attitudes and behavior.

As I noted in August when I explained how much debt there really is in the US:

Then there are unfunded social security and medicare obligations of about $43 trillion according to the Treasury’s own Financial Report for 2008:

The SOSI provides additional perspective on the Government’s long term estimated exposures and costs. However, it should be noted that the Government’s financial statements do not reflect future costs implied by any current policy, such as national defense, the global war on terrorism, and disaster relief and recovery. Table 3 shows the Government’s estimated present value of future social insurance expenditures, net of dedicated future revenues for the programs reported in the Statement of Social Insurance (SOSI), projected to be $43 trillion as of January 1, 2008 for the ‘Open Group’6. While these expenditures are currently not considered Government liabilities, they do have the potential to become liabilities in the future, based on the continuation of the social insurance programs’ provisions contained in current law.

Most importantly, back then I already asserted:

On top of that, I don’t think that people are oblivious to the fact that there is absolutely no way that all social security and medicare benefits will ever be paid. Thus it would only be reasonable to conservatively assume that the present value of those liabilities has dropped (…)

I think it is now clear, even without people yet questioning the ability of the SSA to make the minimum payments: The net present value of unfunded public liabilities has begun to fall, adding in a major way to the current record contraction in credit and loans.

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