By James D. Agresti
May 5, 2022
The U.S. Treasury has published a major report revealing that the federal government has amassed $124.1 trillion in debts, liabilities, and unfunded obligations. To place this shortfall in perspective, it equates to:
- $955,407 for every household in the U.S.
- 29 times annual federal revenues.
- 86% of the combined net worth of all U.S. households and nonprofit organizations, including all assets in savings, real estate, corporate stocks, private businesses, and durable consumer goods like automobiles and furniture.
The new data reflect the government’s finances at the close of its 2021 fiscal year on September 30, 2021. Unlike other estimates of the federal government’s red ink which extend into the infinite future, the figure of $124.1 trillion only includes Americans who are alive right now. Thus, it measures the financial burden that today’s Americans are placing on future generations.
Officially called the “Financial Report of the United States Government,” this 258-page publication is mandated by a federal law which requires the Treasury and White House to produce a full accounting of the government’s “overall financial position” each year. Beyond the national debt, this also includes the government’s explicit and implicit commitments. This methodology approximates the accounting standards that the federal government imposes on publicly traded corporations.
Although the report discloses information of crucial import to the citizens of the United States, Google News indicates that no major media outlet has informed anyone about it since it was released on February 17, 2022.
A Comprehensive Accounting
As explained in the report, the federal government’s budget is “prepared primarily on a ‘cash basis’.” This is an incomplete measure of its finances because cash accounting is the simplistic process of counting money as it flows in or out. For example, cash accounting ignores the pension benefits promised to federal workers until these benefits are actually paid, which is often years or decades after they are promised.
In contrast to cash accounting, this Treasury report uses accrual accounting, which measures financial commitments as they are made. The U.S. Government Accountability Office, the official watchdog of Congress, explains that the report uses accrual accounting “to provide a complete picture of the federal government’s financial operations and financial position.”
The federal government requires large corporations to use accrual accounting for their pension plans because this is the “most relevant and reliable” way to measure their financial health. The same applies to other retirement benefits like healthcare. The official statement of this rule explains that “a failure to accrue” implies “that no obligation exists prior to the payment of benefits.” Since an obligation does exist, failing to account for it “impairs the usefulness and integrity” of financial statements.
Federal Employee Retirement Benefits
The differences between the federal budget and the broader Treasury data have major consequences for future taxpayers, partly because pension and other retirement benefits are a large part of the compensation packages for government employees. When these benefits are included, civilian non-postal federal employees receive an average of 17% more total compensation than private-sector workers with comparable education and work experience. Postal workers receive even greater premiums ranging from 25% to 43%.
In 2020, federal, state, and local governments spent $2.13 trillion on employee compensation, which amounts to an average cost of $16,556 for every household in the United States.
The Treasury report shows that the federal government currently owes $10.2 trillion in pensions and other benefits to federal employees and veterans. To pay the present value of these benefits will require an average of $78,372 from every household in the United States.
Social Security & Medicare
A similar situation exists with social insurance programs like Social Security and Medicare because, contrary to popular belief, these programs don’t save workers’ tax payments for their retirements. Instead, they immediately spend the vast majority of those taxes to pay benefits to current recipients. Thus, they are called “pay-as-you-go” programs.
In stark contrast, the U.S. Bureau of Economic Analysis states that “federal law requires that private pension plans operate as funded plans, not as pay-as-you-go plans.” The reasons for this, as explained by the American Academy of Actuaries, are to increase “benefit security” and ensure “intergenerational equity.” Social Security and Medicare, on the other hand, have levied increasing tax burdens on succeeding generations of Americans and have accumulated trillions of dollars in unfunded obligations.
Federal actuaries measure the unfunded obligations of Social Security and Medicare in several different ways, but only one of them approximates accrual accounting. This is called the “closed-group” unfunded obligation, which is the money needed to cover the shortfalls for all current taxpayers and beneficiaries in these programs.
In the words of Harvard Law School professor and federal budget specialist Howell E. Jackson, the closed-group measure “reflects the financial burden or liability being passed on to future generations.” These burdens are $43.2 trillion for Social Security and $47.8 trillion for Medicare. To place these figures in context:
- Social Security’s unfunded obligations amount to an additional $247,327 from every person who currently pays Social Security payroll taxes.
- Medicare’s unfunded obligations amount to an additional $183,614 from every U.S. resident aged 16 or older.
Those shortfalls are what remain after the federal government has paid back with interest all of the money it has borrowed from Social Security and Medicare. This debunks the common myth that Social Security’s financial problems are caused by the federal government looting it to pay for other programs. Just the opposite, the federal government has repeatedly boosted Social Security by raising its payroll tax rate, increasing its inflation-adjusted taxable maximum, and injecting other taxes to its income stream.
Yet, the program is still facing insolvency, mainly because the ratio of workers paying taxes to people receiving benefits has fallen by 47% since 1960 and is projected to fall further.
Social Security and Medicare differ from true pensions because taxpayers don’t have a contractual right to receive these benefits. Nevertheless, paying these benefits is an implied commitment of the federal government, and federal law requires that these programs be included in the Treasury report.
Beyond the national debt, federal employee retirement benefits, and Social Security and Medicare shortfalls—the Treasury details other obligations of the federal government. These, include, for example:
- $123 billion in accounts payable.
- $613 billion in environmental and disposal liabilities.
- $231 billion in loan guarantee program liabilities.
The Treasury report also measures the federal government’s commercial assets, such as:
- $475 billion in cash and other monetary assets.
- $1.2 trillion in property, plants, and equipment.
- $1.7 trillion in receivable loans, mainly comprised of student loans.
The report, however, doesn’t account for federal stewardship land and heritage assets, such as national parks and the original copy of the Declaration of Independence. While these items have tangible value, the report explains that they “are intended to be preserved as national treasures,” not sold to the highest bidder to cover debts.
In total, the government owned $4.9 trillion in commercial assets at the close of its 2021 fiscal year.
The Grand Total
Adding up the federal government’s debts, liabilities, and unfunded obligations and then subtracting the value of its commercial assets yields a fiscal shortfall of $124.1 trillion.
Moreover, the actual figure may be significantly worse because the Treasury’s data is based on federal agency assumptions that are optimistic in these respects:
- A 2012 paper in the journal Demography found that the Social Security Administration is using an antiquated method to project life expectancies, and as a result, the program “may be in a considerably more precarious position than officially thought.”
- When the federal government makes student loans, it projects that it will eventually reap a 9% average profit from interest on the loans. However, the Congressional Budget Office (CBO) has determined that if the federal government accounted for the market risk of these loans, it would show an average loss of 12% on every dollar it lends. If President Biden forgives more student loans, as he is saying he may do, this would further increase the fiscal burden on future generations.
- The Board of Medicare Trustees has stated that the program’s long-term costs may be “substantially higher” than projected under current law. This is because the price controls in Obamacare will cut Medicare prices for many medical services over the next three generations to “less than half of their level under the prior law.” The actuaries have been clear that this will likely cause “withdrawal of providers from the Medicare market” and “severe problems with beneficiary access to care.”
The Future is Here
In 2013, CBO ran a long-term projection of the publicly held debt, a partial measure of the national debt often cited by federal agencies and media outlets. This projection was unique in that it estimated what would occur under current federal policies and their economic effects, as opposed to other CBO projections that use unrealistic assumptions and budget gimmicks.
CBO’s 2013 projection estimated that the debt would grow over the next two decades to unprecedented levels unless the government changed course. Nine years later, the actual outcomes have been far worse, mainly due to more than $5 trillion in spending on “Covid relief” laws:
Contrary to the media narrative that tax cuts and military spending are to blame for the runaway national debt, the primary cause is greater spending on social programs which provide healthcare, income security, education, nutrition, housing, and cultural services. These programs have grown from 21% of all federal spending in 1960 to 73% in 2020:
A broad range of academic publications explain that excessive government debt can cause far-reaching negative outcomes, such as lower wages, increased inflation, weak economic growth, higher taxes, reduced government benefits, or combinations of such results.
Likewise, the U.S. Government Accountability Office warns that “the costs of federal borrowing will be borne by tomorrow’s workers and taxpayers,” which “may reduce or slow the growth of the living standards of future generations.”
Such effects may have already begun. Although association does not prove causation, the national debt has risen dramatically over past decades, and with this, the U.S. has experienced episodes of historically poor growth in gross domestic product, productivity, and household income. Along with this, rapid inflation has set in, another common consequence of excessive government debt.
While some believe the U.S. government can spend and borrow with abandon because it can print money, one of the most established laws of economics is that there is no such thing as a free lunch. The prolific economist William A. McEachern explains why this is so:
There is no free lunch because all goods and services involve a cost to someone. The lunch may seem free to you, but it draws scarce resources away from the production of other goods and services, and whoever provides a free lunch often expects something in return. A Russian proverb makes a similar point but with a bit more bite: “The only place you find free cheese is in a mousetrap.”