When one reads that total US debt is in the 20 to 110 trillion brackets, it is generally because the author is including unfunded liabilities. The argument to include them is simple: they reflect the government’s obligations to future beneficiaries. Sure, this makes sense, but how are these future obligations calculated?
You guessed correctly, by extrapolation, the holy grail of forecasting. My intent is not to ridicule the estimates done by rigorous professionals or the assumptions behind these estimates. They are particularly interesting, have been performed with extreme attention to detail and by individuals with far greater knowledge than your humble writer. My point is that they are precisely what they are, estimates based on a large number of assumptions. Sure, they are scary. But not so long ago they were just the opposite, reassuring and hugely positive. To gain some perspective I suggest we look at “The budget and economic outlook: Fiscal years 2002-2011” published by the CBO back in January 2001. Gosh! What a difference 9 years makes, and how completely different today is from what was then forecasted! In 2001, it was expected that in 2011, the US would be running a surplus of 889 billion.
Those were clearly the good old days. Fast forward nine years and let’s check out the estimate from the CBO in “The budget and economic outlook: Fiscal years 2010-2020” published January 2010: estimated deficit of 980 billion. A complete 180 degrees change! What is the cumulative deficit expected over the next ten years? 6 trillion! What was the expected accumulated surplus back then? 5.6 trillion, an almost 12 trillion divergence, almost the amount of existing gross government debt outstanding! Ever since estimates have been performed you will notice the same pattern: An extrapolation of the recent trend that leads either to gigantic expected surpluses or monstrous deficits. None of them have ever proven correct. See the size of the “miss” over less than ten years, and now consider that unfunded obligations of Social Security and Medicare are calculated over a period of 75 years or infinite. To say the least, estimates of unfunded obligations don’t appear to provide a reliable indication on what to expect even 10 years out. A continuation of the current trend always looks the most probable, but in fact, at every occasion, history has proven that this simple continuation rarely takes place in the much more path dependent “real” world.
For the sake of providing the information, here are the numbers taken from the “2009 Annual Report Of The Boards Of Trustees Of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds” published May 12th 2009 and “The 2009 Annual Report Of The Board Of Trustees Of The Federal Old-Age And Survivors Insurance And Federal Disability Insurance Trust Funds” published May 2009:
(In trillions of US dollars) 75 years Infinite
Social Security Unfunded Obligations: 5.3 15.1
Medicare Unfunded Obligations: 45.8 88.9
One other reason these numbers are misleading is that the size of the numbers create a comparative fallacy. To put that in perspective what if I told you that these same 45.8 trillion of present value of additional resources that are estimated to be needed to meet projected Medicare expenditures over the next 75 years represent “only” 5.8% of the present value of projected GDP over the same period. Yes, the present value of GDP projected over that period is 791 trillion. Putting side by side the 75 year unfunded obligations estimate with the current GDP size is like determining your salary based on the cost of living in 1935, in other words, informational but useless and probably dangerously misleading. At best it provides a roadmap for the social reforms necessary that must be addressed in the medium term, but most often this comparison simply creates confusion and is used to sensationalize the headline.
Disclosure: No positions