How Can America be in Debt From an Expense She Hasn't Incurred?

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In light of the debate about the national debt, I’ve noticed that several sources have been making an incorrect claim about a very serious topic!

1)  I’ll start with the following claim (due to its succinctness), made by Peter Bella of The Washington Times Communities:

“Bad as it is, the national debt does not constitute the worst part of our predicament. Entitlements pose a far greater problem. Estimates of the long-term costs associated with Medicare, Social Security and Medicaid ranging from $90 to $210 trillion.”

The claim basically mirrors other claims being made:  That future obligations are so large that they dwarf the debt, causing an insurmountable problem.

Peter Bella seems very confident about his claims, as he continues:

“The truth is both straightforward and dire: The US federal government has far more obligations than it can conceivably make good upon. There is simply no way it can meet its dues; the numbers are just insurmountable.

This is a hard fact.”

A hard fact?  Is it?

2)  Here’s another example, by Liam Halligan of The Telegraph, from his article “America appears to be sleepwalking towards disaster – does no one care?”

“Total debts matter even more than annual deficits and on that score America is almost uniquely ‘in the hole’ – with liabilities, including Medicare, Medicaid and social security obligations, amounting to around $75,000bn (£45,000bn), or a stunning five times annual GDP.”

Let’s convert from pounds.  A debt of five times the annual GDP is equal to a debt of about $75 trillion.

3)  Here’s another example (SteynOnline claims it’s from National Review-I wasn’t able to verify the source):

“Our own Kevin D. Williamson puts the FDR/LBJ entitlement liabilities a little north of $100 trillion. Once you add in state and municipal debt, you need to add a zero to that reassuringly familiar $14 trillion hole. The real hole goes ten times deeper: $140 trillion — or about twice as much as America’s total ‘worth.'”

Looking at all three articles, here are some of the terms used:

“predicament”
“far greater problem”
“no way it can meet its dues”
“insurmountable”
“disaster”

I don’t know what your reaction is, but such talk seems to me to imply that the US is in serious trouble as a result of entitlements!

Doesn’t such language give the impression that the real size of the US debt is likely $100 trillion plus?  Some articles specifically claim that the entitlements are part of the US debt, while other articles only label them as “future obligations”, “obligations” or “entitlements”.

Regardless of how they are labeled, I think it’s clear that, regardless of which version of the above wording is used, all of these articles could give the impression that the entitlements are, at worst, part of the US national debt, or at best, a serious problem for the economy!

LET ME MAKE SENSE OF THIS ALL

The very first thing you should ask yourself is this:  Do these claims even make sense?  Are they even plausible?

Let me be clear:  It is not at all plausible that there is an insurmountable level of entitlement debt of over $100 trillion!

Not at all.

Think about it:

1)  First, ask yourself why the government itself doesn’t classify these entitlements as part of the national debt!  That alone should make you at least hesitate to assume the entitlements are debt!

2)  How is a debt created?  One party receives money from another party, and in exchange, owes money to that other party.  It’s that simple.

a)  So, if the American government has debt somewhere between $75 to $210 trillion, wouldn’t you think that America at one point received something in return for those trillions?

Of course. That’s what a debt is.  You receive something, and owe in return!

If the government incurred a debt of $142.5 trillion (the midpoint of the range), the assets it received in return for incurring the debt would be distributed to the population, and would show up in the net worth of Americans!  (I know it would have had to be distributed to the population because there’s no way the government held onto the $142.5 trillion-if it did hold on to the funds, it wouldn’t be in debt by $14.5 trillion!)

Let’s see if America’s net worth does reflect the $142.5 trillion:

What’s the net worth of America?  Is it approaching the $142.5 trillion figure that you’d expect?  No.  Not even close!  As of June 2010, it was only $53.5 trillion!

Think about that.  In 2010, the net worth of Americans (excluding government accounts) was $53.5 trillion.  The net worth of America, overall, would then be arrived at by reducing the $53.5 trillion by the actual federal debt of about $14.5 trillion.  That brings America’s overall (private and government) net worth to $39 trillion.

If, as articles claim, US entitlements put the US government in debt by another $142.5 trillion, meaning they received some type of asset in exchange for owing $142.5 trillion, and if the US government transferred those $142.5 trillion in assets to the population (as a previous paragraph explained), how could the net worth of Americans be only $39 trillion?

The only way that’s possible is if the US once had the assets but lost gargantuan amounts of money every year since!

Now, it’s true the US has been losing a lot of money every year for a few decades now, but the losses have been nothing approaching the $103.5 trillion gap implied by the above figures!

During the ten year period from 2001 to 2010, (that decade had a much worse trade deficit than previous decades), the US loss of wealth from the trade deficit was only $5.6 trillion (who would have thought there’d be a context that would allow me to describe $5.6 trillion using the word “only”?) 

So, the US has not lost wealth anywhere approaching $103.5 trillion!

That alone proves that the US is not hundreds of trillions in debt to entitlement programs!

b)  Let’s take a closer look at the entitlement situation.

Let’s look at Social Security.  Regardless of whether the referenced articles classify entitlements as “debt” or simply “entitlements”, they all refer to future obligations.  If it’s a future obligation, is it really a debt?

Well, I don’t remember hearing about such “debt” being exchanged for an asset.  Do you?

When examining future obligations, you are looking at American seniors who haven’t been paid Social Security yet!  So, if they haven’t been paid Social Security yet, does the US really owe them the money?  There’s been no exchange of an asset for a debt!

Listen, I do agree with this: When you look at the current payout rates of Social Security, and project them into the future, there are many trillions of payouts that are expected to be made.

But the payouts haven’t been made yet!  Certainly, no reasonable person would classify those entitlements as being a real debt, because the government hasn’t borrowed the money and gone into debt to pay the entitlements yet!

Which brings me to my next point:

c)  Aren’t Social Security payments paid by taxpayers?  Isn’t there a deduction taken off of one’s paycheck today, and aren’t those funds used to make Social Security payments today (or to be held in a fund to make future payments)?

The referenced articles discuss future Social Security payments that will be made to seniors, but do their figures also include the future tax deductions that will be deducted to pay for them?

I don’t know.  It’s not clear.

Think about the following example:

Teachers pay the union, and in return the union invests the money and eventually pays teachers a retirement pension.

Would a teachers’ pension fund consider the unpaid future entitlements as debt?

Again, it’s unclear whether these articles are claiming 1) that future entitlements will total $142.5 trillion or 2) that future entitlements are projected to be short the $142.5 trillion needed to fully pay for it (A hypothetical example:  Future total Social Security payments to seniors are $302.5 trillion.  But the Social Security deductions on workers’ paychecks, during that same future period of time, are only $160 trillion.  That leaves a gap of $142.5 trillion).

Conclusion

There is no way that future US entitlements are part of the US debt.  It’s impossible!  No outlays have yet been made, so the US certainly couldn’t have been put in debt by the entitlements!

Even if you don’t agree with the previous paragraph’s logic, by looking only at the net worth of Americans, it’s clear that it’s impossible for the US to have entitlement debt of $142.5 trillion!

Those writing the referenced articles either don’t understand the issue, or are fear mongers!

This isn’t to say that the US shouldn’t pay attention to the entitlement programs!  If indeed it’s projected that the current rate of taxpayer deductions won’t match the future rate of payouts, then something surely needs to be done!  Funds need to be reduced, or government budgets redistributed.

But don’t get it wrong!  Entitlement programs are certainly not debt, much less an “insurmountable” “disaster”!

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