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June 24, 2011
The Reality of the Federal Government's Fiscal Hole
This week, U.S. citizens were granted a reprieve from the fiscal negligence of our federal government when the editorial board of Bloomberg declared "it just ain't so" that American households are on the hook for trillions of dollars in "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."
Regrettably, the paragraph above is written with tongue in cheek, for the editorial board's logic is spurious on all accounts. They are attempting to refute USA Today's and the Peter G. Peterson Foundation's estimates for federal government debts, liabilities, and unfunded obligations ($62 trillion and $62.3 trillion respectively). Our think tank, Just Facts, has performed calculations with similar methodologies that produce a figure in the same ballpark ($56.5 trillion), which equates to $481,000 for every household in the country.
The first "obvious flaw" in such calculations, the Bloomberg editors tell us, is that "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."
Not true. The entire cost of the pension is not taken into account, only the gap between the employee's pension contributions (money or service) and what the federal government has promised the employee in return. Big difference.
Assume for the sake of argument that Bloomberg offers its employees defined-benefit pensions (like the federal government), and imagine that Bloomberg told its editorial board that they would each have to cough up an extra $481,000 in pension contributions above and beyond their current commitments in order to receive the same pensions they were originally promised. Are we to believe that the editors would slough it off by saying, "It's not a problem because the money will be used to pay for our benefits"?
Second, the Bloomberg editors claim that such calculations do not account for the fact that a dollar owed in the future is less of a burden than a dollar owed today.
Wrong again. Our calculations and those of USA Today and the Peter G. Peterson Foundation use net present values that account for the time value of money. To quote the U.S Treasury report from which we obtained most of the data used in our calculations, "The [social insurance] estimates are actuarial present values ... Present values recognize that a dollar paid or collected in the future is worth less than a dollar today, because a dollar today could be invested and earn interest. To calculate a present value, future amounts are thus reduced using an assumed interest rate...."
It bears noting that the figures used by Just Facts are "closed group present values," which are calculated in a manner that approximates how publicly traded companies are required to calculate their debts and obligations. In other words, we are using accounting principles that the federal government demands from publicly held corporations.
Third, the Bloomberg editorialists tell us that such calculations are plagued by "false precision" because they "require peering decades into the future."
Forgive the obvious point, but private pension funds and insurance companies have been performing such calculations for many decades with generally acceptable results. Moreover, are we supposed to ignore the government's liabilities and unfunded obligations because we cannot specify them with absolute precision? Imagine a corporate executive trying to make that argument to the SEC.
Finally, the Bloomberg editors opine, "The notion that you yourself personally owe half a million dollars is simply unreal -- it can't be processed."
Again, pardon the obviousness, but many Americans personally owe this much money and more on their homes, cars, businesses, and credit cards. Do the editors actually think that if we can't process this debt in our minds, we won't have to deal with it? As the recent housing crisis in this country and the debt-induced calamities in Greece and Spain have vividly shown, one cannot live forever on borrowed money, regardless of anyone's mental capacity to conceive it.
James D. Agresti is the president of Just Facts, a nonprofit institute dedicated to researching and publishing verifiable facts on public policy issues.
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