Free Markets, Free People

The tyranny of numbers (Updated)

Let me see if I can quantify the current and future budget situation.  It’s actually quite simple, and doesn’t require knowledge of anything other than elementary mathematics. The most recent analysis of the Federal government’s unfunded liabilities, to include the national debt, debt financing, Social Security, and Medicare, showed total unfunded liabilities of $61.6 trillion. I’ve seen substantially higher numbers in other analyses—up to $75 trillion, depending on how you score it—but let’s take this fairly conservative one.  What are the practical implications of this number?

Let’s see what we’d have to do to pay all that back in 30 years. I picked that length of time because a) it covers the entire span of Baby Boomer retirements, and b) it equals the longest maturity of any Federal debt instrument,  the 30-Year Note.

Let’s look at the rounded numbers, derived from the Statistical Abstract of the United States. In fiscal 2010, GDP was $14.63 trillion.  Of that $2.165 trillion was collected in Federal revenue, or 14.8% of GDP. $61.6 trillion, paid over 30 years, will require equal installments of $2.05 trillion every year.

Now we’ll make some assumptions.  Let’s assume that we get 2% growth this year, and that for the next 29 years, we get an average of 3% growth in both GDP and in tax revenues collected. We also have to assume that the US Government doesn’t run a deficit, or add and more to the national debt between now and 2041. And let’s even assume that the current 14.8% of GDP we’re currently collecting in revenues doesn’t rise to the the historical 17.8% average, and that we can fund the government on just revenues of 14.8% of GDP.

Finally, let’s remember that most revenue that has ever been collected in all of American history, as a percentage of GDP, was 20.6% in 1999, after a substantial economic boom. Prior to that was 1945’s 20.4%.

In order to pay off this year’s share of the $61.6 trillion in unfunded liabilities, the government will have to collect $4.261 trillion in revenues.  With an estimated 2011 GDP of $14.922 trillion, that comes to 28.6% of GDP. If we assume government revenues rise to the historical average, the we’ll need the government to take 31.6% of GDP in tax revenues. Happily, because we’re assuming a 3% rise in GDP and revenues for every year over the next 30 years, that percentage will decline slightly every year, until, in 2041, we’ll only need to collect 20.5% of GDP in tax revenues to pay off the last installment, assuming, again, 14.8% of GDP covers the operation of government.  If we go back to the 17.8% figure, then we’ll have to collect 23.5% of GDP in revenues.

Either way, for the next 30 years, we need to collect substantially higher tax revenues than we have collected at any time in the nation’s history, and we have to do it every year for 30 years.

Quite frankly, I doubt that this is even physically possible, much less politically possible. Quite apart from anything else, I have no confidence whatsoever that we will even have 3% GDP growth under a regime where more than one-quarter of national income is given to the government for the next decade.

If you want to see the year-by-year numbers, my Excel worksheet is here.

Dale Franks
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UPDATE: A commenter points out that shows a total unfunded liability of $114 trillion. I believe that figure goes out to the year 2087, however. But, those calculations wouldn’t look that much different for individual years. We’d just have to support unsustainable taxes for 70 years instead of 30. Not that it matters, ‘cause we won’t do it anyway.

BTW, keep in mind that these numbers are just a simple back-of-the-envelope calculation to wrap our heads around the basic scope of the problem, not a precise model of government expenditures and revenues for the next 30 years. I wasn’t really interested in doing 20 hours of math for a 15-paragraph blog post, after all.

17 Responses to The tyranny of numbers (Updated)

  • Is it reasonable that the entire 61.6 trillion should be paid back in the next 30 years? If some of that 61.6 isn’t going to come due until > 30 years I’d say no.  I don’t know if it is or isn’t, just asking.
    That aside, it’s pretty sobering.  I figure we’ll get 10% annual growth from embryonic stem cell breakthroughs and green jobs.  If that doesn’t do it we can all start breaking our neighbor’s windows, right?

  • Ok, two more things:
    1. This is all being expressed in 2011 dollars, yes?  The 61.6T is in today’s dollars, etc.?
    2. You are adding the annual tax revenues to the unfunded liability payment to get the total revenue needed.  Isn’t some of the unfunded liability covered in the base revenue amount?  Aren’t we paying some of the interest/social security/medicare out of the base amount or is it all being paid for with borrowed dollars?

    • Yes, it’s all in 2011 dollars.

      Yes, some portion is covered in the regular budget. But, of course, the regular budget this year is 40% borrowed money. So, for simplicity, I just stayed with revenues of 14.8% of GDP, and so just shovel the remainder that we’re currently borrowing into the annual payment on the $61.6 trillion.

      It’s just a simple back of the envelope calculation to wrap our heads around, not a precise model of government expenditures and revenues for the next 30 years.

  • O’ course, this presupposes that DC doesn’t flippin’ add to the burden.  Bush gave us the prescription drug benefit; Captain Bullsh*t gave us ObamaCare; who knows what the next person will do?

    • Ha!  You assume a “next person”!!!  Obama said at his birthday last night he was not half done.  Wow…

    • The present person now wants free cell phones for his minions.

      • And had mandated free birth control (which will be very expensive).
        Sounds like a Collectivist party.  They just need free booze and drugs.  Good luck with that…

  • People who lend us money, need to realize if they keep lending us money at this rate, we will have to default.  Its not their responsibility per se, but its almost equally insane for them to keep doing it. 

    • At some point, they will expect a higher rate of return. You charge high interest to high risk borrowers, right?

      • Well, that’s how they would express their concern, with higher rates.  Which obviously appears to not have happened when it should have (or maybe it has but in terms of kicking the can, it seems you can just borrow more money to pay the interest).

        I guess the question is do they defer to the credit rating agencies and what are they smoking? 

    $114,500,000,000,000. – US unfunded liabilities
    To the right you can see the pillar of cold hard $100 bills that dwarfs the
    WTC & Empire State Building – both at one point world’s tallest buildings.
    If you look carefully you can see the Statue of Liberty.

    The 114.5 Trillion dollar super-skyscraper is the amount of money the U.S. Government
    knows it does not have to fully fund the Medicare, Medicare Prescription Drug Program,
    Social Security, Military and civil servant pensions. It is the money USA knows it will not
    have to pay all its bills.
    If you live in USA this is also your personal credit card bill; you are responsible along with
    everyone else to pay this back. The citizens of USA created the U.S. Government to serve
    them, this is what the U.S. Government has done while serving The People.

    The unfunded liability is calculated on current tax and funding inputs, and future demographic
    shifts in US Population.

    Note: On the above 114.5T image the size of the base of the money pile is half a trillion, not 1T as on 15T image.
    The height is double. This was done to reflect the base of Empire State and WTC more closely.

    Everyone needs to see this.

    Source: Federal Reserve & – visit it to see the debt in real time and get a better grasp of this amazing number.

  • Aw, don’t worry, we’ll be involved in a global class war waaay before we get to 30 years.

  • I respect the attempt to justify debt complaints with actual math, and not general blowhard dystopia muttering. Having said that, there are some things about this set of assumptions I don’t understand.
    First of all, if you’ve lumped SS and Medicare obligations into the national debt – it seems like you have – that’s confusing. Why do we have a sudden imperative to pay the national debt off in 30 years? Why not 100? Is there a nation on earth that has a net national debt of $0?

    Secondly – and this is a very, very widespread fallacy – the overwhelming majority of these obligations are expected future health care costs. But there are a very large number of possible ways to control health care costs – preferably by squeezing providers rather than dumping the costs on beneficiaries. Furthermore, even excepting out deliberate cost control, these projections have a large amount of simple extrapolation in them, and who the heck knows if health care costs will continue to rise at the rates of the 90’s/00’s?  Seriously, there has to be some interrelation between GDP growth and cost growth here, and GDP growth expectations are down, but health care cost growth projections are not down in response. Seems unlikely. The point is, though, whether via the Voucher Plan or the Single Rate Plan, a crushing financial burden that is basically optional is… not really an inevitable fate.

    Lastly – it’s not physically possible? What, are you kidding? Where have you come up with this threshold for the physical limits of tax collection? Have you looked at this list?

    You may hate the idea of fully funding Medicare and SS obligations by collecting a lot of tax revenue, and it may be politically impossible, but you haven’t even tried to make a case why doing so isn’t physically possible despite international empirical evidence to the contrary.

    By the way, smaller government advocates should spend some time staring at that list, especially the sub-20%s. It’s not a pretty picture.

    • First of all, if you’ve lumped SS and Medicare obligations into the national debt – it seems like you have – that’s confusing.

      The total unfunded liabilities includes all of it. Would you be happier if I stripped out the national debt, then used the GAAP audit report to give a $100 trillion figure for entitlements?

      …it’s not physically possible? What, are you kidding?

      Nope. I don’t believe the middle class will allow the required increases in taxation and reductions in spending/benefits, and I believe the negative effects of economic growth, if they did, would simply make the GDP percentage a larger share of a smaller pie.

      We’re either going to default, or monetize. I guess, if we do the latter, that would count as “paying” it, though.

    • By the way, smaller government advocates should spend some time staring at that list, especially the sub-20%s. It’s not a pretty picture.

      So what? It’s one thing to have low tax rates because you’re too poor and totalitarian to raise more money–many of those states actually have quite steeply progressive tax rates, for what it’s worth–and to have lower tax rates because you choose to do so.

      Look at the debt:GDP ratios for those countries above 20%. That’s not a pretty–or sustainable–picture either.