June 13, 2012
The growing government debts of countries across the globe continue to dominate headlines. The United States' publicly held debt is expected to exceed 70 percent of gross domestic product (GDP) this year. However, the public debt is only one part of the federal government's total liabilities. For example, in addition to the public debt, federal civilian and military employees have accrued significant pension and other retirement benefits based on their employment in previous years. These obligations are already on the books and will be paid out in the future, say Liqun Liu, a research scientist at the Private Enterprise Research Center at Texas A&M University, and Andrew J. Rettenmaier and Thomas R. Saving, senior fellows with the National Center for Policy Analysis.
- In 2011, the federal government said it owed $10.2 trillion in public debt, accrued federal employee pension and other retirement benefits of $5.8 trillion, and other federal liabilities of $1.5 trillion, for a total of $17.5 trillion.
- However, Social Security and Medicare benefits payable to current retirees are not included as liabilities on federal balance sheets, though these two programs currently account for over one-third of federal spending -- approximately $12.8 trillion.
- The public debt plus benefits payable to federal
workers and the accrued Social Security and Medicare benefits payable to retirees total $30.3 trillion.
The $30.3 trillion, however, only accounts for accrued benefits and does not include the obligations that are expected to arise in coming years; including these obligations results in a much higher number. Indeed, in 2011, a conservative estimate of these amounts totaled $84 trillion -- more than four times what the federal government admits it owes ($17.5 trillion).
We could try to meet these obligations by raising taxes. But how much of the economy can the government claim in taxes each year without adversely affecting GDP growth?
- The funding shortfall is 5.7 percent of the present value of all future GDP.
- This implies that in the long run the federal government will need to increase taxes from its previous 50-year average of 18 percent of GDP to 24 percent of GDP or a tax increase of 30 percent.
The growth of the economy will slow as a result, making it more difficult to meet the federal government's unfunded obligations.
Source: Liqun Liu, Andrew J. Rettenmaier and Thomas R. Saving, "How Much Does the Federal Government Owe?" National Center for Policy Analysis, June 13, 2012.