Key takeaways:
• The official total government debt in the United States is $24.3 trillion—that’s more than
120% of GDP.
• However, the official data doesn’t factor in Social Security and Medicare, which are vastly
underfunded.
• Both programs have run out of reserves this year, which adds a minimum $50 trillion to
government debt, according to the official estimate (professor Larry Kotlikoff thinks the
real number is closer to $210 trillion).
• By 2041, Social Security, healthcare spending, and interest payments on the debt will
consume 100% of federal tax revenue.
In the next recession, the US deficit might reach the $2 trillion mark.
In describing our debt problem over the past couple of years, I’ve discovered a problem: Many of
us define “debt” way too narrowly.
A debt occurs when you receive something now in exchange for a promise to give something back
later. It doesn’t have to be cash.
If you borrow your neighbor’s lawn mower and promise to return it next Tuesday, that’s a kind of
debt. You receive something (use of the lawn mower) and agree to repayment terms—in this case,
your promise to return it on time and in working order.
Uncle Sam has made too many promises to too manypeople, with little regard for its future ability to fulfill them. These are debt. Worse, some of them are additional debt on top of the obligations we already see on the national balance sheet.
Even worse, entire generations have planned their retirement lives around the government
fulfilling those promises. If those promises aren’t met, their lifestyles will be destroyed.
Running Out of Reserves
The official, on-the-books federal debt is currently about $22.1 trillion, according to the US
National Debt Clock. $22.1 trillion is the face amount of all outstanding Treasury paper, including
so-called “internal” debt. It comes to about 105% of GDP, and that’s only the federal government.
If you add in state and local debt, that adds another $3.1 trillion—to bring total US government
debt to $24.3 trillion (more than 120% of GDP).
Then there’s corporate debt, home mortgages, credit cards, student loans, and more. Add it all
together, and total debt is about 330% of GDP, according to the Institute for International Finance
(IIF).
We are in hock up to our ears.
But it’s actually worse than that, due to the kind of promises I mentioned above. Prime among
them are Social Security and Medicare.
Strictly speaking, these aren’t “unfunded” because they have dedicated revenue streams: payroll
taxes. Most Medicare recipients also pay premiums. To date, these revenue sources have covered
current expenditures and more, allowing the programs to build up reserves. But that’s about to
change.
As of this year, both programs are in negative cash flow, meaning Congress must provide
additional cash to pay the promised benefits—and it will get only worse.
The so-called “trust funds” are going to run dry sooner rather than later. Last year’s annual trustee
report estimated Social Security will run out of reserves in 2034, and the hospitalization part of
Medicare will dry up in 2026.
So, talking about running out of reserves in 2034 or 2026 is rather meaningless. We’ve already run
out of reserves. Any time a politician talks about putting a “lock box” around Social Security or
Medicare trust funds, he or she is either staggeringly ignorant or lying.
Worse, the estimates of when the trust funds run out depend on a slew of assumptions, some of
which are too optimistic.
For what it’s worth, the Social Security Administration says it has a $13.2 trillion unfunded
liability over the next 75 years. That’s the benefits it expects to pay minus the revenue it expects to
receive.
Medicare projections require even more assumptions, but the “official” assumptions put
Medicare’s 75-year unfunded liability at $37 trillion. It could be vastly more—or less, if we all get
healthier and healthcare costs drop.
My friend Professor Larry Kotlikoff estimates the unfunded liabilities to be closer to $210 trillion.
That’s a far cry from the $50 trillion official estimate.
So, at a minimum, we can probably assume Social Security and Medicare are at least another $50
trillion in debt on top of the $21.2 trillion (and growing) on-budget federal debt.
