June 22 (Bloomberg) -- On June 6, USA Today led the paper with bad news. “The federal government’s financial condition deteriorated rapidly last year, far beyond the $1.5 trillion in new debt taken on to finance the budget deficit,” the newspaper wrote.
How so? Well, if you figure in the unfunded or underfunded commitments to Social Security participants, Medicare patients, pensions and health care for government retirees, plus retirement and disability payments for the military, the government’s debt increased by $5.3 trillion in 2010. The future debt was $62 trillion as of Jan. 1, 2011, the newspaper calculated. That’s more than four times the official debt ceiling of $14.3 trillion that Democrats and Republicans are quarreling about. And because the government must come to us -- the citizenry -- for money, that works out to over half a million dollars owed by every household in the country.
USA Today isn’t alone in advancing this line of thinking. In 2009, the Peter G. Peterson Foundation did its own calculation and miraculously reached the same conclusion: The federal government’s total projected liabilities as well as the conventional deficit, was $62 trillion ($62.3 trillion to be exact).
Others -- including some in Congress -- have sung the same scary tune. There’s an obvious flaw in this reasoning. In fact, there are several. As deficit hawks ourselves, we were reluctant to point this out, figuring that some aspiring left-wing big spender or right-wing tax cutter would take care of it. But after two weeks, that hasn’t happened. So rather than let a simple accounting error lead people to think they suddenly owe $534,000 as their part of the nation’s debt, we thought it worth explaining why it ain’t so.
Obligations and Assets
In a nutshell, this brand of analysis counts future entitlement and pension payments as obligations of the government, and ultimately of private households, but not as assets for the people who benefit from these payments. If a government retiree is entitled to a pension of, say, $35,000 a year, that is both a cost to the government and a benefit to that retiree. But only the cost is taken into account.
That’s not the only flaw. For the most part, these sorts of approaches assume that a dollar is a dollar, no matter when it comes in or goes out. But a dollar tomorrow is worth a lot more than a dollar 50 years from now. This is not only because of inflation, but also because of the time value of money. A dollar today can be invested, and at 5 percent interest will be worth $11.46 in 50 years. By contrast, the present value today of a dollar 50 years from now (again at 5 percent) is only 8 cents. Much of the $62 trillion that the government supposedly owes is in dollars decades from now.
Then there is false precision. The calculations of USA Today and others require peering decades into the future. Who is to say what medical breakthroughs may extend the average person’s life, or what new plagues may shorten it. Even small changes can have a large impact on the total cost of entitlement programs. The longer out you look, the foggier it gets.
Nevertheless, the $62 trillion figure has made the rounds in the two weeks since it was published.
Trillions have now joined billions as amounts that are part of everyday conversation, but impossible to make meaningful. News that you thought your country owed $14.3 trillion but it actually owe $62 trillion has less impact than pulling a $20 out of your wallet and discovering that it’s only a $10. The notion that you yourself personally owe half a million dollars is simply unreal -- it can’t be processed.
Given this limitation, throwing around billions and trillions may not be the best way to get people to focus on the deficit. We think there’s good reason for alarm, but no reason for exaggerated numbers.
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