America's crushing fiscal gap: it's time to account for future government obligations.

• Author: de Rugy, Veronique
• Position: Columns - Column

The U.S. government has racked up $12 trillion in public debt, a figure equivalent to nearly three-quarters of gross domestic product. Yet that massive sum pales in comparison to the costs of the federal government's unpaid promises, mostly in the form of health care and retirement benefits for seniors.

Although future commitments are not scored by the nonpartisan Congressional Budget Office (CBO), this off-the-books "fiscal gap" is real debt. Economists and lawmakers of all stripes are coming to recognize the need for honest fiscal-gap accounting. In July 2013, Sens. Tim Kaine (D-Va.) and John Thune (R-S.D.) introduced the Intergenerational Financial Obligations Reform (INFORM) Act, which would require the federal government to disclose unfunded obligations.

Estimates of future obligations vary. In 2012, using data from the Medicare and Social Security trustees, former Securities and Exchange Commission chairman Chris Cox and former House Ways and Means Committee chairman Bill Archer estimated that the U.S. faces an $86.8 trillion fiscal gap over the next 75 years. That same year, Cato Institute economist Jagadeesh Gokhale measured the gap using an approach he developed with the Wharton economist Kent Smetters. Under the CBO's baseline scenario, which assumes that certain federal laws will remain unchanged, Gokhale found a $54.4 trillion fiscal gap. Applying the same methods to the CBO's "alternative fiscal scenario," in which current tax and spending policies are assumed to change consistent with previous congressional practice (as opposed to the feckless promises of current politicians), Gokhale reports a $91.4 trillion gap.

Another estimate comes from James D. Hamilton, an economist at the University of California at San Diego. In a paper published last year by the National Bureau of Economic Research, Hamilton calculated the total value of off-balance-sheet federal liabilities, including housing support, loan guarantees, deposit insurance, Federal Reserve liabilities, and federal trust funds for social insurance programs. His total came to $70.1 trillion for 2012, six times larger than the on-the-books debt of $11.3 trillion.

Even those alarming figures are dwarfed by the numbers in a forthcoming paper that the Boston University economist Larry Kotlikoff wrote for the Mercatus Center at George Mason University. Kotlikoff calculates the current fiscal gap at roughly $200 trillion.

The variation among the estimates can be explained by...