Joe Balyeat, a former member of the Montana Senate and self described “national award-winning CPA,” writes in today’s Missoulian that the national debt is much, much bigger than you thought; so big, indeed, that it threatens to consign “our great grandchildren to lifetimes of bondage.”
Purple prose aside, what Balyeat is talking about is something called the “unfunded liability” of the Social Security, Medicare and government pension systems. This unfunded liability is the difference between what these systems are expected to take in and pay out over some time into the future (usually 75 years in the Social Security financial reports). The unfunded liability is calculated in terms of its “present value,” which you can think of as the amount of money you would have to set aside right now, today, to cover all of the excess of pay-outs over income over the next 75 years. To calculate the present value you of course have to take account of the fact that the money you set aside will earn some interest you can use, so it gets a little complicated, which creates good jobs for actuaries.
Balyeat argues that these unfunded liabilities are, after all, payments we are all on the hook for, and should – but don’t – show up on the balance sheet as part of the national debt. When they do, he says, the national debt turns out to be $142 trillion rather than the roughly $17 trillion we thought it was. And that means every single taxpayer is in debt to the tune of $1.25 million! Balyeat doesn’t tell us where he got his numbers – it’s not clear, for example, how many years he’s using to calculate unfunded liabilities – but it really doesn’t make much difference. Because even if they’re right, the numbers don’t mean what Balyeat thinks, or wants us to think, they do.
For one thing, there is a very big difference between money that we actually borrowed in the past and owe today and money we may owe in the future. An unfunded liability – that money we may owe in the future – has to be calculated making some assumptions about how things are going to be done: what the payroll contribution rates, benefit formulas, cost of living provisions, and so forth are going to be. Usually, the assumption in calculating the unfunded liability is that we are going to continue to do what we always have. In other words, we figure out how short we will be if we do nothing.
But as anyone who had paid any attention at all to the public debate over, for example, Montana’s public pension systems should know, we don’t do nothing. Faced with a large unfunded liability, we do adjust contribution rates, benefit formulas, and cost of living provisions. That’s what the legislature did this year and our funded liability was dramatically reduced.
But suppose Balyeat is right. Suppose that the average taxpayer really would need to set aside $1.25 million to cover his or her share of the payments that we are collectively locked into over the next 75 years. Coming up with that money sounds impossible, and since it’s many times more than that average taxpayer will earn this year (about $118,000*), it is. But of course there’s no reason to set aside all that money today. After all, these are payments that are going to be made over the next 75 years, and if he or she lives that long, this taxpayer is going to be earning a growing amount of money every year. So is $1.25 million is big, scary, bondage threatening number? Yes, if you compare it to this year’s income (which is what Balyeat wants you to do), but no, if you compare it to all the income you will earn in the next 75 years (which is what you should do).
Balyeat’s larger project in his Missoulian piece is to attack the “beast” of excessive government spending, so it’s not just debt that’s a problem, it’s the deficit too. It turns out that deficit spending might just “tank” the American economy!! And the evidence for this dire warning is the fact that since 2008, when deficit spending rose, household income fell. Here we have a classic “correlation does not imply causality” problem: as any Economics (but not Accounting, apparently) 101 student can tell you, a decline in household income (triggered by the bursting of a real estate bubble, a financial meltdown and credit freeze, reduced business investment, layoffs, or whatever) can cause the deficit to blow up. And there’s no reason to assume that causality runs the other way.
As state director for Americans for Prosperity – Montana, maybe all Balyeat’s trying to do is provide a little cover for the right wing Republicans in Congress who these days are trying to kill the ACA and burn the fiscal house down. That may be good politics, but it’s bad economics.
*I came up with this figure by dividing total US personal income in 2012 ($13.2 trillion) by 114 million, which appears to be the number of taxpayers Balyeat is using. I have no idea if it’s correct, but I’m trying for apples and apples here. In any case, debt burdens are usually measured with respect to GDP rather than the smaller figure of personal income.