James Hamilton, an economics professor at the University of California, San Diego, just published his best estimate of the federal government’s “off-balance-sheet” liabilities, in which he concludes that the real national debt, popularly estimated to be $16.9 trillion, is in fact more than four times larger: $70.086 trillion. This is because of decisions to leave out certain unfunded liabilities when the national debt is counted. He explains:
This paper examines the growth of federal liabilities that are not included in the officially reported numbers. These take the form of implicit or explicit government guarantees and commitments … housing, other loan guarantees, deposit insurance, actions taken by the Federal Reserve, and government trust funds….
The biggest items in this category come from Social Security and Medicare which, if current policy is maintained, will require enormous sacrifices from future taxpayers….
When Rep. Jim Cooper (D-Tenn.) read the report, he said, “The federal government is the last accounting-free zone in America!” Two former congressmen, Christopher Cox and Bill Archer, were equally appalled: “The U.S. Treasury ‘balance sheet’ does … not include the unfunded liabilities of Medicare, Social Security and other outsized and very real obligations.”
There are two reasons that these huge liabilities are routinely ignored: how the accounting is done, and whether Social Security and Medicare are actually government guarantees or not. Sheila Weinberg, director of the Institute for Truth in Accounting (ITF), says the federal government’s accounting system isn’t allowed to be used by private companies because it is “so unreliable and possibly misleading” — cash accounting instead of accrual. The government includes Medicare and Social Security liabilities only as they come due, rather than using accrual accounting that counts the entire debt burden when the program is launched. So it neatly ignores future liabilities and makes the national debt appear to be much smaller.
The other reason is that the government itself doesn’t consider Social Security or Medicare as guaranteed by the government. According to Hal Steinberg, a member of the Federal Accounting Standards Advisory Board (FASAB), which makes such determinations, Medicare and Social Security, along with veterans’ benefits and government employee benefits, are not binding contractual commitments after all:
“There is no exchange transaction here. When the FASAB board was looking at the best way to report this, the feeling was not to put this on the balance sheet as a liability [because] it really wasn’t a liability.”
In other words, these are promises that the government made but which the government can break at any time. And because there is no actual contract to break there is no accounting liability.