Complete Measures of U.S. National Debt
Complete Measures of U.S. National Debt
Treasury debt held by the public is an explicit pay-as-you-go obligation. The government also runs implicit pay-as-you-go obligations, such as Social Security and Medicare Part A, which are twice as large. Both types of obligations require tax increases and spending cuts to balance the budget over time.
Key Points
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Implicit pay-as-you-go obligations have the same economic effects and fiscal tradeoffs as explicit debt obligations.
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Treasury securities held by the public plus social insurance net obligations to current generations equal 4.9% of the present value of GDP projected over their lifetimes. These implicit obligations are twice the size of explicit Treasury debt.
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A broader measure, including implicit debt over current and future generations, is 6.6% of the present value of future GDP. Restoring a long-term budget balance would require a 14.6% increase in federal taxes and an equal percentage cut in federal expenditure, or some similar combination.
Figure 1 shows past growth in debt and Congressional Budget Office (CBO) debt projections.
Source: Authorsâ calculations are based on Congressional Budget Office âBudget and Economic Outlookâ Reportsâ"year_monthâ as indicated in the figure legend.
Explicit federal debt results from past funding shortfalls under government policies. Annual deficits trigger borrowing from the public through Treasury securities. The government must use future receipts to pay interest and the principal. Each deficit year increases debt, requiring new securities to roll over maturing ones. Larger explicit debt means more future receipts devoted to debt service, reducing funds for public goods and services. The CBO reports explicit debt held by the public was $26.2 trillion at the end of 2023, rising to $28.2 trillion in 2024.
Implicit debt refers to projected shortfalls in receipts compared to non-interest expenditures under current policies. Unlike explicit debt, implicit debt is non-contractual but still a firm government obligation. Explicit debt can be eroded by inflation, except for about 7.8% issued as inflation-protected securities. Reducing implicit debt requires tax increases and expenditure cuts, as most program spending keeps pace with or exceeds inflation. Both types of debt require future federal resources for servicing. Larger explicit debt needs more tax increases and expenditure cuts, while larger implicit debt requires similar adjustments to current policies.
Figure 2 gives an example of implicit debt: Social Security and Medicare Hospital Insurance (HI) are funded by payroll taxes and income taxes on high-income individualsâ Social Security benefits. These programsâ expenditures are determined by eligibility policies and depend on factors like age structure, retirement decisions, and health. Revenues depend on employment and earnings in covered occupations.
Source: Authorsâ calculations based on Congressional Budget Office 10-year projections extended using the Penn Wharton Budget Modelâs microsimulation.
Projections indicate a social insurance funding shortfall of nearly 1% of GDP today, growing to 2.6% by 2050 and 4.6% by 2099. The shortfall, including taxes and benefits for current and future individuals, equals $65.7 trillion for those alive today.
Focusing only on explicit debt is misleading due to significant underfunding of OASDHI programs. Adding explicit debt ($26.2 trillion) and implicit obligations ($65.7 trillion) brings total federal indebtedness to $91.9 trillion, or 340% of 2023 GDP. Extending tax and spending projections to cover all current and future generations, the infinite horizon fiscal imbalance is $162.7 trillion, or 6.6% of the present value of all future GDP.
Restoring fiscal balance will require reducing federal non-interest expenditures or increasing future federal receipts. This can be achieved in various ways, depending on the tax or expenditure bases targeted for adjustment. The broadest base is âtaxes plus expenditures,â which involves an across-the-board immediate and permanent equal percentage reduction in non-interest expenditures and increase in receipts. The first row of Table 1 shows that this would require a 14.6% adjustment.
If the adjustment base is narrowed, the required percentage adjustment increases. Row 2 of Table 1 shows that targeting only taxes would require a 33.4% increase. Row 3 indicates that targeting all non-interest expenditures would require a 26.1% cut. Other policy adjustment variants show different combinations of tax and expenditure bases and their respective adjustment percentages.
The adjustment percentages shown in Table 1 are conventional estimates. They assume policy changes will not induce private economic reactions. For example, tax increases are assumed not to reduce labor supply, and reductions in Social Security or other transfers are assumed not to increase labor supply by individuals working longer hours or delaying retirement.
| Policy # | Policy Specification (immediate and permanent adjustments) | Adjustment Percentage(s) |
|---|---|---|
| 1 | Increase taxes and expenditures in equal percentage change * | 14.6 |
| 2 | Increase all federal taxes | 33.4 |
| 3 | Reduce all federal expenditures * | 26.1 |
| 4 | Reduce all federal transfer payments * | 32.7 |
| 5 | Adjust OASDHI and non-OASDHI programs relative to their FIs. | |
| Adjust OASDHIâs taxes and transfers in equal percentages and⌠| 17.3 | |
| âŚadjust non-OASDHIâs taxes and expenditures in equal percentage | 13.1 | |
| 6 | Adjust non-OASDHIâs taxes and expenditures in equal percentage | 23.0 |
| 7 | Adjust all taxes and transfers; maintain federal purchases * | 16.5 |
| 8 | Hold the elderly (age 60+) harmless under Policy #1 | 15.7 |
* Includes OASDI and Non-OASDI transfers.
Source: Reprinted from Table 3 in Gokhale and Smetters, Public Budgeting and Finance (forthcoming).
Dealing with federal indebtedness requires future resources, impacting the pocketbooks of current and future generations. To estimate this, we calculate baseline net tax payments for these generations under current policies.
Panel A of Figure 3 shows the present value of future net taxes for selected generations, labeled by age in 2024. For example, the Current Policy line shows that a 20-year-old in 2024 has an expected present value of future net taxes of $132,000. These calculations account for mortality rates and represent average actuarial amounts. Older generations are expected to receive net transfers (negative net lifetime taxes) over their remaining lifetimes.
Policy 1 (red lines and bars in Figure 3) involves increasing all federal taxes and reducing expenditures by 14.6%. Panel B shows the impact on individualsâ pocketbooks in constant 2024 dollars. A 20-year-old would pay $426,000, which is $296,000 more than the $132,000 under the current policy baseline. This represents a more than three-fold increase in lifetime net taxes. For a 60-year-old, net benefits would be reduced by $174,000, a 39% cut from their current-policy prospective net benefits of $443,000.
Policy 2 (green lines and bars in Figure 3) targets only taxes. Under this policy, future net taxes for 20-year-olds increase to $489,000, compared to $426,000 under Policy 1. For 60-year-olds, future net benefits decline to $321,000, compared to $269,000 under Policy 1.
Policy 3 (blue lines and bars in Figure 3) targets only federal expenditure. Under this policy, 60-year-oldsâ remaining lifetime net benefits would decrease by $215,000, compared to $174,000 under Policy 1. For 20-year-olds, the adjustment burden would increase by $245,000, compared to $294,000 under Policy 1.
Panel A: Current Policy Baseline and Across-the-Board Adjustment to Lifetime Net Taxes by Age in 2024
Panel B: Present Value Changes in Prospective Net Taxes by Age in 2024 (Adjustment Policy minus Current Policy)
Excluding expenditure-side adjustments would necessitate substantial increases in the lifetime net taxes of young and future generations. For example, a 20-year-oldâs lifetime net taxes would increase by $357,000 if only taxes were increased, compared to $294,000 under the across-the-board adjustment in taxes and benefits. Compared to the across-the-board policy, an exclusive benefit-side policy change would reduce the adjustment on a 20-year-old from $294,000 to $245,000.
The reason for these results is that including adjustments to benefits distributes some of the adjustment cost to retirees, expanding the population that bears the adjustment cost. In contrast, excluding expenditure changes concentrates the adjustment burden on younger and future generations.
Policies 4 through 8 of Table 1 concentrate the adjustment on a subset of federal programs and age groups, resulting in larger adjustment rates. Their effects per capita are distributed according to the age groups subject to the taxes and benefits targeted for adjustment (not shown).
Applying an immediate and permanent across-the-board adjustment to federal taxes and expenditures of 14.6% to eliminate the fiscal imbalance may be infeasible in the short term. An alternative is to calculate annual adjustments to constrain the debt-to-GDP ratio to a predetermined percentage. Figure 3 shows the time profile of conventional annual fiscal adjustment rates for equal percentage increases in all taxes and cuts to all non-interest expenditures to maintain the debt-to-GDP ratio at its current 100% of GDP.
Under this policy, the adjustment rate will be small in the next few years due to small federal primary deficits (non-interest expenditures minus receipts). The rates will increase over time and plateau slightly above the 14.6% âfull across-the-boardâ adjustment rate (Policy 1 in Table 1). This occurs because the debt-stabilization policy prevents the accumulation of budget surpluses in the short term that would have occurred under Policy 1. The adjustment rate is small in 2025, increases rapidly over the next two decades, and plateaus at an average of 17.1% in the long term.
The adjustment-rate profile in Figure 4 should be viewed with caution. Significant and lasting changes to taxes and expenditures are likely to induce changes in economic behavior, affecting labor supply, saving, investment, capital, the rate of technological advances, and GDP growth. These changes will affect the long-term adjustment profile.
Figure 5 shows the distributional effects of the debt-stabilization policy compared to Policy 1 of Table 1. The gradual policy involves smaller adjustments to current retireesâ taxes and benefits, resulting in smaller adjustment costs for them since they receive substantial net benefits during their remaining lifetimes.
In contrast, younger and future generations would pay more in net taxes due to the higher final adjustment rate under the debt-stabilization policy. The distributional effects shown in Figure 4 should be considered rough approximations, as they assume no changes in future economic behavior by workers, savers, and investors.
Federal indebtedness extends beyond explicit debt reported in federal financial accounts. Under current fiscal laws and policies, the government must pay benefits to eligible individuals, but its receipts are projected to fall short of these obligations. A significant portion of federal (non-interest) payment obligations may be as strong or stronger than their obligation to service explicit debt. This generates implicit debt that, when added to explicit debt, increases federal indebtedness severalfold.
Including unfunded Social Security and Medicare (Part A) obligations for those living today places federal indebtedness at $103.2 trillion, or 4.7% of the present value of GDP projected over the next 100 years. Including unfunded obligations to future generations makes the federal fiscal imbalance $162.7 trillion, or 6.6% of the present value of GDP calculated without a time limit.
Restoring fiscal balance requires an across-the-board tax increase and expenditure reduction of 14.6%. Concentrating on taxes alone would reduce the adjustment cost for older generations and increase it for younger and future ones. Concentrating on the adjustment on federal expenditures alone would shift the burden away from younger and future generations toward current older generations.
This analysis was produced by Jagadeesh Gokhale and the faculty director, Kent Smetters. Mariko Paulson prepared the brief for the website.
This Brief borrows heavily from
Gokhale, Jagadeesh and Kent Smetters, 2024. âUnited States federal indebtedness and fiscal policy trade-offsâ in Public Budgeting & Finance, November. http://doi.org/10.1111/pbaf.12376