HomePublic FinancesThe full scope of U.S. federal government liabilities

The full scope of U.S. federal government liabilities

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James Hamilton from the University of California has published some scary numbers on growth and size of U.S. federal government liabilities that are not included in the official debt statistics. Their main constitutents are underfunded Social Security and Medicare liabilities, loan guaranties, and the federal deposit insurance. According to the Hamilton’s research ‘the total dollar value of notional off-balance-sheet commitments came to USD70 trillion as of 2012, or 6 times the size of the reported on-balance-sheet debt’.

 “Off-Balance-Sheet Federal Liabilities”, James D. Hamilton, University of California, San Diego
 http://dss.ucsd.edu/~jhamilto/Cato_paper.pdf

The below are excerpts from the original report. Cursive lines and underscores have been added.

Key numbers on U.S. federal government liabilities

“U.S. federal debt has exploded in recent years, growing from USD5 trillion (or 36% of GDP) in 2007 to an estimated USD12 trillion (72% of GDP) by the end of 2013.”

“But…in addition the government has made a number of implicit and explicit commitments that are not included in the net debt figures just reported, but which could potentially require much larger adjustments in future spending or taxes. Adding all the off-balance- sheet liabilities together, I calculate total federal off-balance-sheet commitments came to USD70.1 trillion as of 2012, or about 6 times the size of the on-balance-sheet debt.”

“The motivations for off-balance-sheet commitments…include preventing or responding to financial crises, subsidizing socially desired activities, and commitments to retirees.”

Key categories of off-balance commitments

1. Social Security

“Social Security…anticipates significant liabilities associated with payments expected by current and future retirees. It is true that these liabilities do not rise to the status of the ‘full faith and credit of the United States.” The federal government might well choose to reduce payments to beneficiaries relative to those anticipated under the program’s current practice, or might increase future payroll taxes. But these are of course the same options that the government would consider in figuring out how to honor its official on-balance-sheet liabilities as well. The political difficulties that the government might face in making changes to the public’s perceived Social Security obligations should reasonably be regarded as an important influence on the government’s ability to honor its on-balance-sheet liabilities.”

“The Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Funds makes several efforts to estimate the present value of these obligations along with their offsetting tax receipts…As of the end of calendar year 2012, the difference between the two, or the present value of the unfunded obligation for current participants, came to USD26.5 trillion, up from USD16.5 trillion in 2006…[This number] already subtracts the off-balance-sheet asset of Social Security represented by future tax revenues targeted for the program.”

2. Medicare

[Medicare is a national social insurance program, administered by the U.S. federal government since 1965, that guarantees access to health insurance for Americans aged 65]

“Medicare Part A (hospital insurance) reported a present value of unfunded obligations for current program participants of…USD9.6 trillion by the end of 2012. Medicare Part B (medical insurance) was adding an additional USD13.1 trillion as of the end of 2012, while Part D (prescription drug insurance) adds another USD4.9 trillion, for a total of $27.6 trillion in unfunded obligations currently reported for Medicare…These numbers represent the net off-balance-sheet liabilities associated with Medicare.”

3. Debt and mortgage guarantees of “Government-Sponsored Entities”

“Having been originally created through an act of Congress, and with the federal government today being the sole owner… it seems appropriate to consider both the direct debt obligations of the GSEs [Government Sponsored Entities, i.e. the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac)] and other government housing agencies, as well as their outstanding mortgage guarantees, as an off-balance sheet liability of the federal government. It should be recognized that such liabilities do not have the same status as the direct debt obligations of the Treasury itself. For one thing, there are some offsetting assets, namely the mortgages held outright…Nevertheless, it seems a useful exercise to calculate the total notional value of these off-balance-sheet debts and guarantees…[which] sum to USD7.5 trillion as of the end of FY 2012, two-thirds as big as the entire stock of Treasury debt held by the public.

4. Non-housing federal loan guarantees

“Donghoon Lee (2013) estimated from household-level credit data that the outstanding stock of student loans grew from a little over USD300 billion in 2004 to nearly a trillion dollars by 2012. Federal loans and loan guarantees have played a key role in funding this explosion of student debt [resulting in off-balance sheet liabilities of USD120 billion at the end of 2012].”

“There are a few other categories of explicit loan guarantees that the General Accountability Office recognizes as official off-balance sheet liabilities of the U.S. government. The biggest among these are small business loans and loans from the Export-Import Bank of the United States. These loans added USD205 billion to the off-balance-sheet total.”

5. The Federal Deposit Insurance Corporation

“The Federal Deposit Insurance Corporation (FDIC) is a government corporation that was created as part of the Banking Act of 1933. The FDIC’s role was to insure small depositors against losses if their banks became insolvent.”

“The insurance is funded by a fee on banks. As of the end of 2012, the Deposit Insurance Fund had USD33 billlion in assets, primarily in the form of debt obligations from the U.S. Treasury that are not included in the USD11.3 trillion debt held by the public. ..This equity alone would hardly be sufficient to cover losses if there were to be a major nationwide bank panic. The Competitive Equality Banking Act of 1987 reaffirmed that ‘deposits up to the statutorily prescribed amount in federally insured depository institutions are backed by the full faith and credit of the United States.’…the current figure for total FDIC-insured deposits would be approximately USD5.9 trillion [after the expiry of guarantees reduced the number from USD7.4 trillion at the end of 2012].”

Editor
Editorhttps://research.macrosynergy.com
Ralph Sueppel is managing director for research and trading strategies at Macrosynergy. He has worked in economics and finance since the early 1990s for investment banks, the European Central Bank, and leading hedge funds.