Debt vs Unfunded Liability: Entitlement Commission Bait and Switch

by Bruce Webb

A bipartisan group of Senators is making a push to tie an increase in the debt ceiling to establishment of a Commission whose focus in on reducing the growth of entitlements. Now clearly Medicare spending growth at its current rate is not sustainable, which fact makes the current full-throated defense of that spending by Republicans fairly ironic, but something should be done and in fact is being done via the current HCR proposals. But pointing to the Debt Clock is not a good reason to slash away at Medicare or Social Security, because those slashes actually make that Clock run the wrong way by increasing and not decreasing Public Debt.

Why cutting spending increases debt explained under the fold.

When the Peter G Peterson people claim that Social Security and Medicare are in crisis they tend to use Unfunded Liability over the Infinite Future Horizon as the measure and so produce figures like $105 trillion. Which they then divide by current population to produce a debt per person figure as in every man, woman and child owes $33,000 or whatever. But this is to confuse two very different things. Because at the bound Unfunded Liability and Public Debt move in opposite directions.

In FY 2000, the last full FY of the Clinton Administration, the United States ran a Unified Budget surplus of $235 billion. Hurrah! But the Public Debt Clock showed an increase in debt of $18 billion. Oh noes! Why the disconnect? Because Trust Fund surpluses score as debt for the purpose of total Public Debt. If we go to the Treasury’s Debt to the Penny web application and insert a starting point of Sept 30, 1999 and an end date of Sept 29, 2000 we see that on the first day of that Fiscal Year Debt held by the Public, which included the Chinese Central Bank was $3.636 trillion. By the final day that was down to $3.405 trillion. This was unequivocal good news, not only did the US open up that much more borrowing room for FY 2001, it also cut $10 billion a year off of projected debt service going forward. But if we shift our eyes two columns to the right we see that total Public Debt went up from $5.656 trillion to $5.674 trillion. And the reason is simple, investing Social Security surpluses in Special Treasuries adds to Intragovernmental Holdings which with Debt Held by the Public makes up Public Debt.

All of which leads to some paradoxical results. Currently Social Security is running a moderate but shrinking cash surplus from excess FICA collections plus tax on benefits. That cash surplus (which CBO calls ‘Primary surplus’) plus the amount of accrued interest makes up the total Social Security Surplus which is then combined with a General Fund surplus/deficit to create a Unified Budget surplus/deficit, making large SS cash surpluses a good thing. On the other hand each of those dollars gets converted to an interest earning Treasury so adding a dollar to total Public Debt plus some 3-5% compounded interest so ticking the Debt Clock up. Under current revenue and spending models the Primary Surplus is set to dwindle and then disappear in 2017 at which point the Trust Fund would have to start taking a portion of its accrued interest in cash rather than Special Treasuries and so causing the rate of increase in Public Debt due to Social Security to slow down. Some six years later those same projections show that paying full scheduled benefits will require all accrued interest which so caps the Trust Fund balance and so the maximum amount of Public Debt due to Social Security. In succeeding years this draw down extends to TF principal and so starts reducing Public Debt until sometime after 2039 the Trust Fund is exhausted and no longer contributing to Public Debt at all.

But what happens if we convene an Entitlements Commission and simply adjusted the scheduled benefit so that current year tax revenues met current year outlays? Well two things. One unfunded liability goes to zero. Two Public Debt skyrockets at whatever rate the compounded interest mounts up. So when Senators point to the Debt Clock and proclaim that $12 trillion in Public Debt is a reason to cut Social Security they are wittingly or not confusing Unfunded Liability and Public Debt which for Social Security move in opposite directions.

There are reasons to fix Social Security by putting it on a glide path to Long Term Actuarial Balance, which is to say a system whose overall financing pays 100% of whatever scheduled benefits may be while maintaining a minimum of 1 year in projected reserves in each of the next 75 years, and in principle this could be done with minor tweaks on either the revenue or benefit side. Coberly has long proposed fixing it on the revenue side and so ran the numbers for what we call the Northwest Plan, I following Professor Rosser have been willing to entertain the risk of small benefit cuts because we believe that the current economic model of Intermediate Cost is too pessimistic, but either way the argument doesn’t turn on specific figures on the Debt Clock which for the purposes of this discussion are irrelevant.

Under the Northwest Plan the Social Security Trust Funds will have a combined balance of $33 trillion in 2085 which will score as such on the Debt Clock. And servicing the Trust Funds will require some transfers from the General Fund to keep that balance from compounding out of control, a transfer that will grow every year, but on balance by a more or less steady share of national income growth. Leaving Social Security with an Unfunded Liability of $0.

I don’t know if every Senator pushing for an Entitlements Commission understands that at the bound Public Debt and Unfunded Liability move in opposite directions, that solutions aimed at the latter actually potentially exacerbate the former but certainly you would expect that a former Comptroller General of the United States would understand the budgeting mechanism. For him to point at the Debt Clock as a reason to move on Social Security is just special pleading and playing games with with incommensurate numbers. What we have is two big numbers that in different ways represent some sort of forwarded shifted liability. Which doesn’t mean we can wander from one to the other at will.
BTW the same argument holds to a limited degree for Medicare Part A (though not B & D). Any act which extends the life of the HI Trust Fund equally serves to increase Public Debt relative to the baseline over that period. Kind of a “No good deed goes unpunished” deal.