Issue Position: How Large is the National Debt

Issue Position

In this article, we do not consider the question, "How bad is the national debt?" We may write such an article in the future when we fully understand evidence that makes the answer clear. We have answered the question "What should we do about the national debt?" in Wealth and Taxation. Here we discuss the size of the national debt.

There is a lot of disagreement and outright anger on the Internet over estimates of the size of the national debt. The Federal Reserve Board puts the national debt at the start of 2013 at about $12 trillion. However, bloggesphere estimates range as high as $70 trillion. That's a difference that makes a difference. There are three issues that account for the disagreement.

Issue # 1

This first issue concerns government trusts that have loaned money to the General Fund. The chief of these is the Social Security Trust. (It may be useful to read our article on Social Security.)

When you pay your taxes, some of that money goes into the Social Security Trust Fund. A lot more of it goes into the General Fund that pays for almost everything else. At present, the Social Security Trust is in the black by $2.6 trillion. That money has been invested in government bonds. So the General Fund now owes Social Security about $2.6 trillion. Many bloggers think that's a terrible thing, that the government has "raided" Social Security. However, the money must be invested somewhere. Most investors think government bonds are a secure investment. That's why they don't have to pay much interest.

Other bloggers think the money owed to the Social Security Trust should be included in the national debt. Here is why it should not be included.

How we define the national debt depends on what our concerns are about the consequences of the national debt. Right now, about 7% of our federal taxes go to paying interest on the debt. If there was no national debt, we could pay 7% less and still maintain government services. (Of course, we still wouldn't have a balanced budget.)

As the national debt increases, more of our taxes are needed to service that debt. Now, how should we look at the money owed to Social Security by the General Fund? It's the interest that counts!

The General Fund pays interest to Social Security on the money owed. When you pay your taxes to the General Fund, some of that money gets transferred to the Social Security Trust. All that has happened is that you have really paid some of your Social Security taxes through the General Fund. If debt owed to Social Security increased, you'd be paying more into Social Security through the General Fund. But Americans don't lose what they pay into Social Security. They get it back. It is only interest paid to entities outside the government that costs you money.

The principle owed to Social Security will show up like this: If nothing changes, sometime around 2019, Social Security income will fall below the benefits owed to retiring Baby Boomers. In other words, Social Security will have a budget deficit. That, of course, will increase the national debt. We will notice it because Social Security will start dipping into its Trust Fund. That will require the General Fund to borrow money from private investors to make up for what it has paid back to Social Security. The national debt will then go up.

All of this is well understood by government economists who include it in their projections of what the national debt is going to be in the future. But right now, money owed to Social Security is not part of that debt. It is under-funding of Social Security in the future that will cause the national debt to go up in the future.

Is it a good idea for the government to have a budget deficit. No, it creates future debt. Does it mean that money the government owes to itself needs to be included in the national debt. No, you wouldn't worry about money you owe yourself, and you shouldn't worry about money the government owes itself.

Issue # 2

The second chunk of money that some bloggers think should be included in the national debt involves government guarantees. The government guarantees student loans and (through the F.D.I.C.) the security of a lot of personal bank accounts. If every student should fail to repay his or her loans, and all the banks were to go broke, the government would be on the hook for more than $20 trillion dollars. Should we call that debt?

Never mind that students cannot declare bankruptcy on their student loans, and the F.D.I.C. has a $25 billion trust fund. Suppose you cosigned on $1000 in loans for each of your 20 children, would you conclude that you are $20,000 in debt? No, you would think, "Well, I may get stuck paying off a couple of these loans. So I'd better plan on $2000 for that." All of this is well understood by government economists who make reasonable projections of how much these guarantees are likely to cost the government. If they're wrong, if things go so badly that no one can repay their student loans, and all the banks fail, there's no way we can protect ourselves against such a catastrophe by thinking we have a $30 trillion debt now.

Issue # 3

Finally, some bloggers point out that no business would be permitted to account for their employee retirement plans the way the government accounts for Social Security. They want to include the entire future obligation of Social Security to working Americans in the national debt. They are absolutely right about what businesses must do, and absolutely wrong about how the government should figure its debt. Here's the difference.

If a business has an employee retirement plan, the plan is paid for while the employees are working for the business. The money is ordinarily placed in a trust. You would not let a business say, "Oh, we'll pay your retirement out of the profits we'll be making when you retire." You can't count on the business to be there when you retire. So, businesses must make payments to the retirement fund as they go. That means either less profit or greater debt each year.

Social Security was created at a time when retired citizens were in desperate need of help. Even if they had the self-discipline to save for retirement, the Great Depression prevented them from setting money aside. So, the Social Security deal was struck. Working Americans paid for the Social Security benefits of a generation of elderly Americans who suffered through the Great Depression. When the first generation to pay into Social Security retired, the next generation of working Americans paid for their benefits. Ever since, working Americans have been paying for the Social Security benefits of retired Americans. That arrangement is acceptable because we have a reasonable expectation that the government will be there to collect the taxes and make the payments.

Now, when bloggers write that the government is not accounting for Social Security benefits the way a business would have to, they are telling you that the government should be adding its future obligations to Social Security to its present debt. If you are planning to buy a car in 20 years, and make payments on the car from the money you will be earning in 20 years, would you call the price of that car part of your present debt? That is what bloggers are telling you when they write that our national debt is $60 trillion dollars because government is not charging future Social Security benefits to current debt.

A Few Last Words

If a politician tells you to look up at that cloud that looks like giraffe, put your hand on your wallet. But the national debt is just what government accountants say it is - $12 trillion dollars too much. Anger at the politicians doesn't make it any bigger.

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