Larry Kotlikoff: Detroit just filed for bankruptcy, endangering, among other things, the pensions and health care benefits of 21,000 municipal retirees. But Detroit didn’t just go bankrupt. It’s been bankrupt for years. Yet no one, particularly its accountants and actuaries who spent years cooking the books, was paid to admit it.
Washington is also bankrupt and has been for years. Just like Detroit, successive administrations and Congresses from both parties have spent decades hiding the real magnitude of our county’s fiscal liabilities.
The debt Uncle Sam publicly acknowledges — official federal debt in the hands of the public — is now $12 trillion. But the true measure of our debt — the one suggested by economic theory — is the fiscal gap, which totals $222 trillion. The fiscal gap is the present value of all future expenditures, including servicing outstanding official federal debt, minus the present value of all future receipts.
Detroit’s main means of hiding its true liabilities was discounting its future obligations at a rate far higher than appropriate, thus giving the appearance that less saving was needed to cover the shortfall.
Washington’s dirtier trick has been to keep virtually all of its future liabilities off the books, which creates the vast ocean separating the fiscal gap and the official debt. Decisions about what debts to put on and what debts to keep off the books are not grounded in economics; this duplicitous accounting is grounded in linguistics.
The different checks my 68-year-old friend Paul receives from the U.S. Treasury are a good example. Except for the amounts, the greenish-yellowish checks are identical, with “U.S. Treasury” printed in majestic old English font and a lovely engraving of the Statue of Liberty. One of these periodic checks is for Paul’s Social Security benefits. The other is for interest and principal on his U.S. Treasury bonds. Each comes like clockwork. Each is owed to Paul in every economically meaningful sense.
The difference between the two is that the present value of the checks for interest and principal is carried on the government’s books, whereas the present value of the checks for Social Security benefits is not.
If anything, the Social Security benefits, and not the Treasury bond payments, should be recorded as official debt. The chances that Uncle Sam will renege on Paul’s Treasury bonds (large gobs of which are held by Chinese and other foreigners), via inflation if not outright default, are much greater than the chances it will stop paying his Social Security benefits. If you doubt this, ask the 38 million American voters organized with the American Association of Retired Persons (AARP) how they’d react to a cut in their Social Security benefits.
