The national debt is at $14.5 trillion, but the real debt is the $211 trillion in unfunded liabilities.
The national debt is the United States' current outstanding debt obligations. Though the current debt is quite high, discussion of the current debt avoids the real issue that Standard & Poor's attempted to raise with its downgrade of the nation's credit rating.
The current level of debt is large, but manageable. The levels of future debt are where the real problem lies and where policy solutions need to be addressed.
The U.S. government has made promises that it will be unable to keep under current policies. The two biggest drivers of the nation's unfunded liabilities are Social Security and Medicare. The retirements of Baby Boomers, increased life spans and increasing costs of health care are rapidly driving up the costs of these programs. The revenue for these programs, from payroll taxes, do not cover the costs of these programs. They must be paid for, therefore, through other taxes or by borrowing money.
Current unfunded liabilities for Social Security, the amount the program is projected to cost minus the projected amount that will be raised through the Social Security payroll tax at current levels, is about $15 trillion.
Current unfunded liabilities for Medicare are much higher. The amount the program is projected to cost minus the projected amount that will be raised through the Medicare payroll tax at current levels is about $80 trillion. Medicare's prescription drug benefit adds another $20 trillion in unfunded liabilities.
The unfunded liabilities do not, however, stop there. The U.S. government also has unfunded liabilities in retirement benefits for federal workers, health and retirement benefits for active-duty military personnel, and state and local government obligations.
So what is the real debt? What is the amount that the U.S. government has promised to pay minus the amount it is expected to collect in taxes? Laurence J. Kotlikoff, professor of economics at Boston University, estimates that number at $211 trillion.
“That's the fiscal gap. That's our true indebtedness,” Kotlikoff told NPR.
To deal with the true debt, therefore, Congress must deal with the two biggest drivers of the true debt: Medicare and Social Security.
Reforming these programs has proven difficult because the beneficiaries of these programs, the elderly, represent a large voting bloc, and they vote in high numbers. On the other hand, those who have the most to lose because of unfunded liabilities, the young, do not vote in high numbers.
Reforming Social Security and Medicare is also complicated by the pervasive misinformation regarding these programs. Many of these programs beneficiaries believe, for instance, that they are only getting out of the program what they put into it, in the form of payroll taxes while they were working. This is not true. Most beneficiaries will get much more out of Social Security and Medicare than they ever put into them in their lifetimes.
One popular reform idea is to reduce the rate of growth of these programs. Opponents of this reform idea complicate matters what they accuse reformers of “cutting” the programs. Beneficiaries wrongly assume that they will see a reduction in benefits when, actually, their benefits will continue to grow, even faster than inflation under some reform proposals.
So, what will it take to cover the nation's unfunded liabilities? “What you have to do is either immediately and permanently raise taxes by about two-thirds, or immediately and permanently cut every dollar of spending by 40 percent forever,” Kotlikoff said.