Taking Stock of the Long-Term Fiscal Picture

The Congressional Budget Office (CBO) isn't the only agency in town that does long-term projections. The Treasury Department annually releases the Financial Report of the United States Government, which shows a number of different measures of the federal government's fiscal health both in the past fiscal year and over the next 75 years. That report shows the U.S. government has over $56 trillion of unfunded liabilities over the next 75 years.

When looking at the past fiscal year, the Financial Report uses net operating cost rather than the budget deficit as its primary metric. Net operating cost accounts for the current fiscal year on an accrual basis, so it takes into account changes in future federal employee and veterans benefits and government asset valuations not shown by the budget deficit. Net operating cost typically exceeds the budget deficit, and in FY 2013 it totals $805 billion, almost a fifth more than the $680 billion deficit.

A long-term measure of the government's fiscal situation is net liabilities. This 75-year measure takes into account government assets, debt held by the public, net liabilities of the federal employee and veterans benefit systems, and the net liabilities of Social Security and Medicare. Adding all these up yields net liabilities of $56.6 trillion. Note that these liabilities only take into account dedicated payroll taxes and offsetting receipts and do not include discretionary and other mandatory spending or other revenue.

The table below shows those projections for this year and from the reports for the previous three fiscal years.

U.S. Government Assets and Liabilities (billions)
  FY 2013 FY 2012 FY 2011 FY 2010
Assets $2,968 $2,748 $2,707 $2,884
Debt Held by the Public  -$12,028 -$11,332 -$10,174 -$9,060
Other Liabilities*  -$7,849 -$7,517 -$7,319 -$7,297
Net Position  -$16,909 -$16,101 -$14,785 -$13,473
Net Liabilities of Social Security  -$12,294 -$11,278 -$9,157 -$7,947
Net Liabilities of Medicare Part A (HI)  -$4,772 -$5,581 -$3,252 -$2,683
Net Liabilities of Medicare Parts B and D (SMI)^  -$22,530 -$21,593 -$21,320 -$20,130
Net 75-Year Social Insurance Liabilities  -$39,698 -$38,554 -$33,830 -$30,857
Total Liabilities  -$56,607 -$54,655 -$48,615 -$44,330

Source: Treasury Department
*Includes liabilities of federal employee benefits, veterans benefits, and other liabilities.
^Does not include federal general revenue transfers.

Liabilities can be projected using a number of different assumptions, so the Financial Report's numbers are just one measure. Robert Kaplan and Dave Walker estimated the unfunded liabilities number at $70 trillion for FY 2012. Using their assumptions, we estimate their number would be similar this year.

Adding in all other noninterest revenue and spending to the calculation shrinks the total net liabilities in the Financial Report to $4 trillion since general revenue exceeds non-social insurance spending. Of course, interest is a major expense over the long term, and that is borne out in the more traditional fiscal statistics, which show debt rising inexorably over the next 75 years.

In terms of more commonly used fiscal statistics, debt as a percent of GDP rises from 73 percent in 2013 to 112 percent of GDP in 2043 and 277 percent of GDP in 2088, a path that is very similar to CBO albeit slightly worse. The fiscal gap – the amount of non-interest deficit reduction needed annually to keep the debt in 75 years at current levels – is 1.7 percent of GDP.

Source: Treasury Department

The Financial Report also notes the cost of waiting to make changes. The fiscal gap grows from 1.7 percent to 2.1 percent of GDP if lawmakers wait ten years to make changes, and it grows to 2.6 percent if lawmakers wait twenty years. As the report itself states, "Subject to the important caveat that changes in policy are not so abrupt that they slow the economy’s recovery, the sooner policies are put in place to avert these trends, the smaller the revenue increases and/or spending decreases will need to be to return the Government to a sustainable fiscal path."

We've shown before that the same fact applies to delaying changes to Social Security. We couldn't agree more that making changes to the budget sooner rather than putting off the necessary adjustments is the way to go.