U.S. - Other unfunded liabilities
Background: This is the third post in a series looking at U.S. government debt. In previous posts I considered the official U.S. Federal debt and the "off balance sheet" liabilities for "entitlements". In summary, the debt owed to public is about $10 Tr. and the amount owed on entitlements will be about $6 Tr. for the next 12 years (3 presidential terms). Together, this is larger than the annual GDP of the U.S.
And there's more: Besides these, the U.S. Federal government has taken on other obligation. For example, Fannie and Freddie guarantee about $5 Tr. worth of mortgages, and even though the government long insisted that it was not liable for these, when push came to shove the government stepped in to support these "government-sponsored entities".
With these guarantees, one can know the maximum possible liability, but the actual liability is difficult to estimate. Thankfully, the actual liability will be lower. For instance, Fannie and Freddie will not have to pay up on every loan they insure, not even on a majority of such loans. Let's consider the maximum amounts that have been guaranteed (Figures are from this very readable 2009 Econbrowser post -- the author, James Hamilton, is not a free-market advocate, but he is reliable on data and not given to hyperbole).
FDIC $ 5 Tr.
Fannie and Freddie $ 5 Tr.
Federal Home loan banks $ 1 Tr.
Ginnie Mae $ 0.5 Tr.
FHA $ 0.5 Tr.
*** TOTAL *** $ 12 Tr.
It is extremely unlikely that the Federal government will have to pay out even half of that maximum guarantee. On the other hand, those number are from 2009. According to Comstock, the FHA guarantees now amount to $1 Tr. It is probably conservative to say that this, along with any additional guarantees over the next few years, will amount to (say) $2 Tr of actual, potential liability. [Fannie and Freddie are the biggest, but their loans tend to be of decent quality. On the other hand, the FHA loans are poor quality, but the total amount is "just" a trillion.]
Pensions: There's also an issue with state pension liabilities. These are under-funded. While these are not federal, they're still governmental. It is quite possible that the Federal government will step in with funding to shore these up at some point. These are under-funded by $2.5 Tr., according to an NBER research paper. The government's Pension Guaranty Corp (PBGC) also under-writes private pensions, but the liabilities here are likely to be a few tens of billions... which is a "rounding error" when we're at this order of magnitude.
Total: Adding it all together, the U.S. government owes about $ 20.5 Tr. This is 136% of the annual GDP of $15 Tr. It also amounts to 35% of all the wealth in the U.S. What this means is that 35% of all homes, all stocks, all bank accounts, all ownership stakes in businesses, all added up is what the U.S. government owes. And, this with the critical assumption that we're looking just 12 years out. If we assume entitlements will not change, and we look out a few decades... ... the numbers are mind-boggling.
Update (June 16, 2012): A JP Morgan report estimates public pensions are underfunded by about $4 Tr.
And there's more: Besides these, the U.S. Federal government has taken on other obligation. For example, Fannie and Freddie guarantee about $5 Tr. worth of mortgages, and even though the government long insisted that it was not liable for these, when push came to shove the government stepped in to support these "government-sponsored entities".
With these guarantees, one can know the maximum possible liability, but the actual liability is difficult to estimate. Thankfully, the actual liability will be lower. For instance, Fannie and Freddie will not have to pay up on every loan they insure, not even on a majority of such loans. Let's consider the maximum amounts that have been guaranteed (Figures are from this very readable 2009 Econbrowser post -- the author, James Hamilton, is not a free-market advocate, but he is reliable on data and not given to hyperbole).
FDIC $ 5 Tr.
Fannie and Freddie $ 5 Tr.
Federal Home loan banks $ 1 Tr.
Ginnie Mae $ 0.5 Tr.
FHA $ 0.5 Tr.
*** TOTAL *** $ 12 Tr.
It is extremely unlikely that the Federal government will have to pay out even half of that maximum guarantee. On the other hand, those number are from 2009. According to Comstock, the FHA guarantees now amount to $1 Tr. It is probably conservative to say that this, along with any additional guarantees over the next few years, will amount to (say) $2 Tr of actual, potential liability. [Fannie and Freddie are the biggest, but their loans tend to be of decent quality. On the other hand, the FHA loans are poor quality, but the total amount is "just" a trillion.]Pensions: There's also an issue with state pension liabilities. These are under-funded. While these are not federal, they're still governmental. It is quite possible that the Federal government will step in with funding to shore these up at some point. These are under-funded by $2.5 Tr., according to an NBER research paper. The government's Pension Guaranty Corp (PBGC) also under-writes private pensions, but the liabilities here are likely to be a few tens of billions... which is a "rounding error" when we're at this order of magnitude.
Total: Adding it all together, the U.S. government owes about $ 20.5 Tr. This is 136% of the annual GDP of $15 Tr. It also amounts to 35% of all the wealth in the U.S. What this means is that 35% of all homes, all stocks, all bank accounts, all ownership stakes in businesses, all added up is what the U.S. government owes. And, this with the critical assumption that we're looking just 12 years out. If we assume entitlements will not change, and we look out a few decades... ... the numbers are mind-boggling.
Update (June 16, 2012): A JP Morgan report estimates public pensions are underfunded by about $4 Tr.
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