A report released today by Goldman Sachs says that if push comes to shove, the federal government will pay its lenders before it pays Social Security and Medicare beneficiaries. Debt service “should be seen as the top claim on government resources in most cases,” says the Goldman analysis.
On one hand, the idea that lenders come first is blindingly obvious. Just look at what happened last summer, when the government tied itself in knots to make sure it didn’t default on bond payments. Of course lenders stand at the head of the line for taxpayers’ money. On the other hand, if things got really bad in the U.S.—as in Greek bad—the priority of payments could start to flip. At some point, as we have seen in Athens, citizens rise up against lenders and insist that the country protect its own ill and elderly before it pays faceless creditors at home and abroad.
So it’s interesting for all concerned—creditors and beneficiaries of the federal government alike—to understand how much the government owes to whom.
One number soars scarily above all others. It’s the burden of Social Security, Medicare, and other entitlements in excess of money set aside for them, otherwise known as “unfunded entitlement payments.” Their net present value is 188 percent of gross domestic product. By contrast, debt held by the public—which got all the attention last summer—has a net present value of 54 percent of GDP. The federal government’s total on- and off-balance-sheet net liabilities, present and future, have a net present value of 299 percent of gross domestic product, Goldman calculates.
It’s a good bet that the government will find a way to shrink the burden of its unfunded entitlement payments in coming decades through some combination of raising taxes for trust funds, cutting benefits, and bending the curve on health-care costs. But owners of Treasuries beware: If those efforts happen to fall short, debtholders just might be forced to bear some of the pain.