CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

A

PAPER

SEPTEMBER 2004

Measures of

the U.S. 

Government’s

Fiscal Position

Under

Current Law

CBO

© Royalty-free/Vol. 70/Corbis

The Congress of the United States O Congressional Budget Office

CBO

Measures of the U.S. Government’s 

Fiscal Position Under Current Law

August 2004

A

PAPER

Preface

Policymakers and other observers have expressed concern about the federal government’s 

current and future liabilities and commitments as the aging of the U.S. population brings 

demographic pressures to bear on the major federal retirement programs. Reflecting those 

concerns, the Concurrent Resolution on the Budget for Fiscal Year 2004 included a provision 

directing the Congressional Budget Office (CBO), in consultation with the Senate Budget 

Committee, to prepare a report presenting estimates of the current and future costs of federal 

programs, as well as estimates of the contingent liabilities of some of those programs and of 

the government’s unfunded liabilities. This paper responds to that provision, explaining financial accounting and other approaches to measuring the federal government’s fiscal position 

and describing the strengths and weaknesses of those alternatives. In keeping with CBO’s 

mandate to provide objective, impartial analysis, the paper makes no recommendations.

Many analysts contributed to the report. David Torregrosa and Marvin Phaup of CBO’s 

Microeconomic and Financial Studies Division coordinated its preparation, with contributions from Deborah Lucas of Northwestern University and CBO’s Elizabeth Robinson and 

Robert Sunshine. Roger Hitchner provided direction, and Douglas Hamilton offered helpful 

comments. In addition, Paul Burnham, Kim Cawley, Paul Cullinan, Sandy Davis, Heywood 

Fleisig, Peter Fontaine, Geoffrey Gerhardt, Kathleen Gramp, Arlene Holen, Noah Meyerson, 

Sam Papenfuss, John Sabelhaus, Eric Schatten, Michael Simpson, and Thomas Woodward, all 

of CBO, made useful suggestions, as did Dave Koitz, John Sturrock, and Eric Wang, who 

have since left CBO. Jim Patton of the University of Pittsburgh and a member of the Federal 

Accounting Standards Advisory Board (FASAB); Robert Bramlett and Wendolyn Comes, also 

of FASAB; Glenn Follette of the Federal Reserve Board; Robert Kilpatrick of the Office of 

Management and Budget; Ron Feldman of the Minneapolis Federal Reserve; and Allan Lund 

of the Department of the Treasury’s Financial Management Service (FMS) reviewed several 

drafts. Colleen Graham of the FMS and Jagadeesh Gokhale of the CATO Institute supplied 

some of the data.

Leah Mazade edited the report, and Christine Bogusz and John Skeen proofread it. Rae Roy 

typed early drafts of the text. Maureen Costantino prepared the report for publication and 

designed the cover. Lenny Skutnik produced the printed copies, and Annette Kalicki prepared 

the electronic versions for CBO’s Web site.

Douglas Holtz-Eakin

Director

August 2004

Summary vii

Budgets, Financial Statements, and Other

Fiscal Measures 1

The Budget of the U.S. Government 2

The Federal Government’s Financial Statements 2

Long-Term Budget Projections 6

Summary Present-Value Measures 8

Future Program Costs, Contingent

Liabilities, and Unfunded Liabilities 11

Future Costs of Current Programs 11

Contingent Liabilities 12

Unfunded Liabilities 17

CONTENTS
vi MEASURES OF THE U.S. GOVERNMENT’S FISCAL POSITION UNDER CURRENT LAW

Tables

1. CBO’s March 2004 Baseline Projections 3

2. The Federal Government’s Balance Sheet, 2002 and 2003 5

3. Reconciling Net Operating Cost and the Budget Surplus or Deficit,

2001 Through 2003 7

4. Sensitivity of Fiscal Imbalance Measures to Different 

Discount Rates and Growth Assumptions 10

5. Social Insurance and Other Federal Commitments,

2001 Through 2003 14

6. Contingent Liabilities of the Federal Government,

2001 Through 2003 15

Figures

1. Total Surplus or Deficit Under CBO’s Long-Term Budget Scenarios 8

2. Federal Debt Held by the Public Under CBO’s Long-Term

Budget Scenarios 9

3. Medicare Spending Under Current Law 12

4. Social Security Spending and Revenues Under Current Law 13

Box

1. The Balance Sheet for the Pension Benefit Guaranty Corporation 16
Summary

Aprovision included in the Concurrent Resolution on the Budget for Fiscal Year 2004 requested information about three areas of the government's finances: 

the costs of current federal activities and programs over 

the long term, contingent liabilities (in general, money 

that the government could owe for potential losses 

through its insurance or other programs), and so-called 

unfunded liabilities for programs such as Social Security 

and Medicare. The provision directed the Congressional 

Budget Office (CBO), in consultation with the Senate 

Budget Committee, to report on those costs and liabilities—which could grow with the expected aging of the 

U.S. population over the next several decades and wtih 

the benefits and services that the government would provide under current law. 

CBO finds that the government already provides much 

information about those budgetary demands and their 

likely size through federal financial reporting in the budget, the financial statements of the U.S. government, and 

various supplements to each. However, the government’s 

current financial reporting—especially for the three potential claims on fiscal resources on which the Sense of 

the Senate provision focuses—presents long-term fiscal 

pressures and financial risks in an uneven manner. In particular:

B The future costs of current programs are a quantitatively significant source of growth in the long-term demand for government resources. Those costs are 

regularly reported as supplementary budget information (such as CBO’s analyses of the long-term budget 

outlook) and notes to the financial statements. Those 

sources provide depictions of future budgetary demands and related uncertainty.

B Contingent liabilities arising from government operations and programs raise concerns because their magnitude and timing are difficult to predict. The 

presentation of contingent liabilities in both the government’s budgetary and financial documents could 

be improved.

B The term “unfunded liabilities” has been the source of 

considerable confusion, leading some people to misconstrue the economic significance of trust funds and 

trust fund balances. The term may also suggest that 

certain liabilities are funded when, in fact, the real 

source of all funding is the government’s ability to levy 

taxes.

Federal Financial Reporting

The financial condition of any public or private entity is 

the result of the flow of cash and other resources into and 

out of the entity over time. Those flows may be represented in a number of ways, each of which provides a different perspective on the same information. The federal 

budget, for example, includes the government’s recent 

past, current, and near-term future revenues and expenditures generally on a cash-flow basis. By contrast, the government’s financial statements report cumulative (past) 

net flows as well as some of the assets that the government 

owns or controls and the liabilities that it owes. Both presentations, however, are based on the underlying flows of 

financial resources that are at the center of the government’s financial position. 

Through the budget and the financial statements—and 

supplemental presentations built on the data they contain—federal financial reporting provides extensive information on the projected future costs of current programs, 

investments, and other governmental activities. However, 

at present, those sources do not systematically present the 

financial risks and uncertainty surrounding contingent liabilities, a category of claims that could change the demands on the federal budget.
viii MEASURES OF THE U.S. GOVERNMENT’S FISCAL POSITION UNDER CURRENT LAW

Current Financial Measures of

Programs’ Future Costs, Contingent 

Liabilities, and Unfunded Liabilities

The three specific areas of concern about current financial measures noted in the budget resolution’s provision 

differ significantly both in concept and in their potential 

magnitude. The future costs of current programs, while 

not known with certainty, can be estimated by projecting 

cash flows on the basis of expected demographic and economic conditions over an extended time span. In contrast, contingent liabilities are cash flows of unknown size 

and timing that result from the federal government’s assumption of financial risk. Unfunded liabilities are computations of imbalances between particular cash flows 

(for example, payroll taxes and Social Security benefits).

Future Costs of Current Programs

The government’s near-term expected cash flows are 

shown in five- and 10-year budgets. But the legislation 

governing certain major federal programs commits the 

government to payments much farther into the future. 

Scheduled federal outlays—especially for social insurance 

programs such as Medicare and Social Security—are expected to grow significantly over the next several decades. 

To depict the financial consequences of that growth,

long-term budget projections extend the budget’s horizon 

for 50 to 100 years. Those projections show that future 

federal spending as a percentage of gross domestic product (GDP)—excluding interest payments on government 

debt held by the public—could range from 17 percent to 

33 percent in 2050, versus the 18.5 percent share for such 

spending in 2003.1

 As a result, unless taxation reaches 

levels that would be unprecedented for the United States, 

current spending policies are unlikely to be financially 

sustainable over the next 50 years.

Supplements to the government’s financial report also 

display some financial flows expected over the long run. 

Those flows are usually expressed as discounted present 

values.2 Summary present-value measures augment the information found in the financial report by tallying in a 

single number those expected long-term obligations.3 As 

of 2003, for example, the government’s outstanding responsibilities for social insurance benefits were reported 

to be $26.9 trillion, most of which was attributable to

Social Security and Medicare. 

Long-term budget projections present useful information 

about future expenditures under current law. While informative about the direction and magnitude of spending 

pressures, the particular numerical estimates are characterized by considerable uncertainty. Some analyses attempt to quantify the estimates’ inherent broad range of 

uncertainty.

Summary present-value measures are subject to the same 

uncertainty; in addition, they obscure information about 

the projected timing and trends of spending commitments and require analysts to choose discount rates. 

Those summary measures of costs are also difficult to interpret. For most major federal programs, those measures 

reach trillions of dollars but provide little information 

about the resources that will be available to pay costs as 

they occur. One useful approach is to compare those costs 

with GDP, which represents the economic resources 

available for public as well as private activities.

Contingent Liabilities

The federal government provides explicit or implicit insurance coverage against a number of contingencies: the 

failure of banks and pension plans, property and casualty 

losses from terrorism and natural disasters, and crop failures—to name some of the largest. Under each of those 

programs, the federal government assumes the risk of future losses. Although the range of possible claims is potentially extensive, contingent liabilities are not likely to 

be large relative to the total federal budget. However, it is 

rare to be able to anticipate the timing or amount of what 

must be paid. 

The budget recognizes the losses from those contingencies when the government makes cash payments to beneficiaries. Multiyear budget projections attempt to anticipate a “normal” amount of such spending. However, in 

any budget period, it is possible that no outlays will be 

made or that income from premiums will exceed outlays. 

1. Congressional Budget Office, The Long-Term Budget Outlook 

(December 2003), Table 1-1, p. 7.

2. The present value is a single number that expresses a flow of current and future income (or payments) in terms of an equivalent 

lump sum received (or paid) today. A discount rate is applied to 

future cash flows to account for the fact that people place less 

value on a dollar in the future than they do on one in the present, 

and so a dollar today is worth more to them than a dollar tomorrow.

3. Such summary measures use an accrual approach rather than a 

cash basis, accounting for transactions when they occur rather 

than when the resulting cash comes in or goes out.
SUMMARY ix

The resulting net cash inflow could cause observers to 

underestimate the government’s exposure to loss—especially when the commitments involve costs associated 

with infrequent events. By comparison, the government’s 

financial report includes estimates of some contingencies, 

in accompanying notes—but only for losses considered 

reasonably possible. For example, the most recent such 

estimate of net contingent liabilities for federal insurance 

programs (that is, amounts not offset by future premiums) totaled $93 billion in 2003. Almost all of that 

amount consisted of potential liabilities of the Pension 

Benefit Guaranty Corporation.

Although federal financial reporting contains a significant 

amount of information about some contingencies, all reports of contingent liabilities are incomplete. No report 

includes all contingencies, such as the federal government’s expected responses to natural disasters (for example, earthquakes or floods) or the financial risks associated with government-sponsored enterprises (such as 

Fannie Mae and Freddie Mac). Yet federal supplemental 

emergency appropriations in response to natural disasters 

averaged more than $5 billion annually in the 1990s. Nor 

do those measures include contingencies associated with 

government support of multilateral financial institutions.4

 And if the government-sponsored enterprises were 

to receive a federal bailout (which is not currently required by law), the costs would probably be tens of billions of dollars.5

A second cause of incomplete reporting on contingent liabilities involves the manner in which the federal government estimates the magnitude of those potential claims. 

Those uncertain future costs may be underestimated because no cost is currently recognized for bearing the risk 

associated with uncertainty.6

Unfunded Liabilities

The term “unfunded liability” has been used to refer to a 

gap between the government’s projected financial commitment under a particular program and the revenues 

that are expected to be available to fund that commitment. But no government obligation can be truly considered “unfunded” because of the U.S. government’s sovereign power to tax—which is the ultimate resource to 

meet its obligations.

The term “unfunded liability” is most often used in relation to trust funds and trust fund balances. That linkage 

may create the impression that, because those funds report positive balances, future federal commitments are already “paid for,” or funded. And certain taxes—especially 

payroll taxes for Social Security and Medicare, which are 

credited to those trust funds—may lead taxpayers to believe that they have paid for future benefits. Trust funds 

can be useful mechanisms for monitoring the balance between earmarked receipts and a program’s spending, but 

they are basically an accounting device, and their balances, even if “invested” in Treasury securities, provide 

no resources to the government for meeting future funding commitments.7

 When those payments come due, the 

government must finance them in the same way that it finances other commitments—through taxes or borrowing 

from the public. Thus, assessing the state of the federal 

government’s future finances requires measuring such 

commitments independently of their trust fund status or 

the balance recorded in the funds.

More particularly, such an assessment requires determining whether a gap exists between revenues and expenditures over time, information provided by the budget and 

by long-term budget projections. For example, revenues 

dedicated to the Social Security program will remain at 

approximately 5 percent of GDP for the foreseeable future, whereas program outlays will rise to above 6 percent 

of GDP by 2050—an annual gap of more than 1 percent 

of GDP at that time.8

4. See the statement of Douglas Holtz-Eakin, Director, Congressional Budget Office, The Costs and Budgetary Treatment of Multilateral Financial Institutions’ Activities, before the Senate 

Committee on Banking, Housing, and Urban Affairs, May 19, 

2004.

5. See the statement of Douglas Holtz-Eakin, Director, Congressional Budget Office, Regulation of the Housing GovernmentSponsored Enterprises, before the Senate Committee on Banking, 

Housing, and Urban Affairs, October 23, 2003.

6. See Congressional Budget Office, Estimating the Value of Subsidies 

for Federal Loans and Loan Guarantees (August 2004).

7. See Congressional Budget Office, Federal Debt and the Commitments of Federal Trust Funds, Long-Range Fiscal Policy Brief 

No. 4 (revised May 6, 2003), and Acquiring Financial Assets to 

Fund Future Entitlements, Long-Range Fiscal Policy Brief No. 8 

(June 16, 2003).

8. For more detail, see Congressional Budget Office, The Outlook for 

Social Security (June 2004).
x MEASURES OF THE U.S. GOVERNMENT’S FISCAL POSITION UNDER CURRENT LAW

A related approach is to express program flows as assets 

and liabilities and focus on the difference, yielding a measure of the aggregate fiscal imbalance, or fiscal gap, for the 

government as a whole. Such measures incorporate the 

assumption that taxes will remain at specified levels, a 

premise required for calculating the difference between 

what costs are likely to be and the resources that will be 

available to fund them. Some analysts estimate that the 

fiscal gap for the entire federal government today is between 6.5 percent and 7.5 percent of the present value of 

GDP.9

As with long-term projections, measures of fiscal imbalance are necessarily uncertain and require a number of 

somewhat arbitrary assumptions about future spending 

and tax policy. Also, present-value measures are difficult 

to translate into policy prescriptions because they obscure 

the pattern of expenditures over time. Programs such as 

Social Security and Medicare, for which costs are expected to increase in the future, offer a useful example. 

The actuarial measure of the programs’ solvency is 

strongly linked to the period selected for analysis.10

Many policies could be adopted that would set the actuarial balance to zero over the next 30 to 50 years but leave 

an imbalance in subsequent years. Moreover, policies 

based on actuarial or present-value measures might assume that future federal commitments could be paid for 

in advance by accumulating governmental receipts in advance of expenditures. However, as explained above, earmarked receipts are an accounting device, and such receipts cannot be separated from other government 

finances and set aside for future expenditures. 

9. The first estimate is from Jagadeesh Gokhale and Kent Smetters, 

Fiscal and Generational Imbalances: New Budget Measures for New 

Budget Priorities (Washington, D.C.: AEI Press, 2003). The second estimate is from Alan J. Auerbach, William G. Gale, and 

Peter R. Orszag, “Reassessing the Fiscal Gap: The Role of TaxDeferred Saving,” Tax Notes, vol. 100, no. 4 (July 28, 2003), pp. 

567-584.

10. Actuarial estimates are the summary measures used primarily by 

federal social insurance programs.
Measures of the U.S. Government’s

Fiscal Position Under Current Law

In the coming decades, the federal government will 

face a number of fiscal demands under current law. In 

particular, as the U.S. population ages—in large part the 

result of the demographics of the baby-boom generation 

and the continued lengthening of life spans in the United 

States—increased demands will be placed on the budget 

to fund retirement- and medical-related benefits. Adding 

to the substantial array of future fiscal commitments is 

the responsibility for potential liabilities in the form of 

government-insured losses stemming from unforeseeable 

events. 

Some concerns exist that policymakers and citizens may 

not be adequately informed about the expected demands 

on the federal budget in coming decades. Despite the 

large amounts of information included in the budget and 

federal financial reports, many observers believe that current federal financial reporting may not adequately reflect 

the long-term fiscal position of the United States.1

 The 

Concurrent Resolution on the Budget for Fiscal Year 

2004 included a provision that directed the Congressional Budget Office (CBO), in consultation with the 

Senate Budget Committee, to report on three areas in 

which current financial reporting on long-term fiscal demands may be particularly problematic: the long-term 

costs of federal programs, contingent liabilities, and socalled unfunded liabilities.2

This analysis describes the various measures that are used 

to track the government’s financial transactions and fiscal 

position. It concludes with a discussion of the current reporting on the three key areas of interest to the Senate.

Budgets, Financial Statements, and 

Other Fiscal Measures 

The financial condition of any public or private entity is 

the result of the cash and resource flows into and out of 

that entity over time. Those flows can be described in 

various ways, but financial reporting generally takes one 

of two approaches: a presentation of past, current, and 

near-term future revenues and expenditures on a cashflow basis.3 For the government, that information is provided in the budget and in the government’s financial report, a statement of the entity’s assets and liabilities and 

changes in those values. Both of those documents are updated and issued annually.

To provide a longer-term perspective, long-term budget 

projections typically extend the annual budget’s forecast of 

the near term (five to 10 years) to between 50 and 100 

years; those projections are made on a cash-flow basis under current law. Summary present-value measures convert 

long-term budget projections into net liabilities by discounting expected flows to their present values.

All financial reporting is based on the same transactions 

but presented in a variety of formats. Each measure has 

strengths and limitations; no single approach can provide 1. Concerns about that issue are widely shared. See, for example, 

General Accounting Office (now the Government Accountability 

Office), Fiscal Exposures: Improving the Budgetary Focus on LongTerm Costs and Uncertainties, GAO-03-213 (January 2003); Peter 

S. Heller, Who Will Pay? Coping with Aging Societies, Climate 

Change, and Other Long-Term Fiscal Challenges (Washington, 

D.C.: International Monetary Fund, 2003); and the statement of 

Douglas Holtz-Eakin, Director, Congressional Budget Office, The 

Economic Costs of Long-Term Federal Obligations, before the House 

Committee on the Budget (July 24, 2003).

2. Section 608 of H. Con. Res. 95, Concurrent Resolution on the 

Budget for Fiscal Year 2004, 108th Cong., 1st sess. (2003).

3. Cash accounting recognizes, or takes account of, transactions 

when cash inflows or outflows occur. Accrual measures recognize 

transactions in the period in which they occur even though the 

cash flows do not occur until some time in the future. 
2 MEASURES OF THE U.S. GOVERNMENT’S FISCAL POSITION UNDER CURRENT LAW

an all-purpose picture of the government’s finances. 

Taken together, however, the measures may be designed 

to complement one another and offer a gauge of the current and future financial implications of present policies. 

The Budget of the U.S. Government

The federal budget, which is submitted by the President 

to the Congress each year in February, consists of multiple volumes and databases that report on various aspects 

of the government’s financial condition and performance 

to date.4 Included in that analysis are detailed tables for 

each spending account (which describe past-, current-, 

and budget-year expenditures) and several volumes that 

provide additional analysis. Each year, the Office of Management and Budget (OMB) issues budgetary reporting 

requirements to agencies, and those guidelines change 

frequently so as to gather new data that are thought to be 

of interest to policymakers and the public.

The budget has two primary reporting functions. The 

first is to report on the past and expected flows of cash 

into and out of the U.S. Treasury, and for the most part, 

the budget assigns those cash flows to the year in which 

they occur. Specifically, the budget reports revenues and 

expenditures for the past year; estimates revenues, obligations, and expenditures for the current year; and projects 

future revenues and spending for five- or 10-year periods 

on the basis of current law. (Those current-law projections make up what is called the budget baseline.) In 

some instances, the budget counts as outlays some 

amounts that are obligated now but will be paid in the 

future. Examples include the expected costs of federal 

loan guarantees.5

The budget’s second informational function is to provide 

reliable information on which the Congress can base decisions about funding for the government’s programs and 

activities and to present a comprehensive proposal from 

the President for spending during the budget year and 

subsequent periods. The President and the Congress generally use “budget authority”—which is provided in appropriations or through other laws—to direct and limit 

the amount of the government’s “obligations” (binding 

legal agreements to purchase items or services). Those obligations eventually result in cash outlays (funds paid out 

of the Treasury). The President’s budget records and 

projects each step in the process—from the provision of 

budget authority through an agency’s obligation of funds 

to the resulting outlays from the Treasury. 

A key measure of fiscal balance for the federal budget is 

the surplus or deficit in a given year—the difference between revenues received by and outlays from the Treasury. In 2003, for example, the deficit was $375 billion 

(see Table 1 for CBO’s estimate of the March 2004 baseline, including surplus/deficit projections). Another key 

budgetary measure of the government’s financial position 

is the amount of its debt that is held by the public (generally in the form of Treasury securities). If the government 

spends more than it collects, it borrows the balance from 

the public. If it collects more than it spends, it reduces 

the debt.6 In general, the cumulative measure of imbalances (across all periods) is the sum of all surpluses and 

deficits—or government debt held by the public. At the 

end of fiscal year 2003, that debt totaled $3.9 trillion, or 

36 percent of gross domestic product (GDP). Comparisons of government debt held by the public and GDP are 

an important measure because GDP represents the economic resources available to finance public as well as private activities. 

The Federal Government’s Financial Statements

Issued annually by the Treasury, the financial report of 

the U.S. government includes assets, liabilities, and net

4. The term “budget” can apply to a variety of plans. For example, 

“the budget” may also refer to the budget resolution (the fiscal 

plan adopted by the Congress) as well as to the appropriation and 

authorizing legislation enacted to carry out that plan. In this 

report, the term “budget” refers to the President’s budget request. 

The “budget year” refers to the first year for which discretionary 

appropriations have not yet been enacted and for which the budget proposes a spending plan.

5. That treatment is required by the Federal Credit Reform Act of 

1990, under which the budget accounts for credit programs so 

that their costs can be more easily compared with the costs of 

other kinds of federal spending.

6. The change in debt held by the public does not exactly equal the 

surplus or deficit. For example, the budget deficit for 2003 was 

$375 billion, but the increase in debt held by the public for that 

year was $373 billion. Most of the difference between the two 

measures is attributable to the funding of financing accounts for 

federal direct loan programs—which increased the government’s 

borrowing requirements but not outlays or the deficit. The government also reduced the Treasury’s cash balances in 2003, which 

lessened borrowing (by freeing up that cash for other purposes).
MEASURES OF THE U.S. GOVERNMENT’S FISCAL POSITION UNDER CURRENT LAW 3

Table 1.

CBO’s March 2004 Baseline Projections

(Billions of dollars)

Source: Congressional Budget Office.

Notes: Off-budget entries in the table are spending or revenues excluded from the budget by law, such as the revenues and outlays of the 

Social Security trust funds and the transactions of the Postal Service.

n.a. = not applicable.

cost. The report primarily uses an accrual rather than a 

cash basis of accounting.7 An accrual system recognizes 

transactions when they occur rather than when the resulting cash comes in or goes out. For example, the financial 

accounts recognize the costs of federal employees’ pensions and other retirement benefits as they are earned. 

Similarly, changes in environmental and disposal liabilities are estimated and reported as expenses when agencies 

become liable for cleaning up hazardous waste at federal 

sites rather than when the government actually pays for 

that remediation. Thus, under an accrual approach, sums 

that are committed in the current period but that will be 

paid out later are included in the current period’s expenses.

The primary goal of the financial report is to provide a 

statement of the government’s net financial position and 

how that position changed—in terms of the income the 

government received and the expenses it incurred—during the fiscal year (October 1 through September 30). 

The government uses a format much like that used by 

publicly traded corporations. The report is prepared according to generally accepted accounting principles proTotal, Total,

Actual 2005- 2005-

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2009 2014

794 762 885 997 1,074 1,146 1,237 1,335 1,528 1,684 1,786 1,896 5,339 13,569

132 161 223 264 272 274 275 277 285 295 306 318 1,308 2,789

713 747 789 830 868 906 946 988 1,031 1,076 1,123 1,173 4,340 9,732

144 148 152 164 170 178 185 184 190 215 224 234 849 1,896 ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ _____ _____

1,782 1,817 2,050 2,255 2,384 2,505 2,643 2,785 3,035 3,271 3,439 3,620 11,837 27,986

On-budget 1,258 1,273 1,477 1,654 1,755 1,846 1,953 2,064 2,282 2,484 2,618 2,762 8,685 20,895

Off-budget 524 545 572 601 629 659 690 721 753 786 821 858 3,152 7,091

825 895 936 956 973 998 1,021 1,045 1,074 1,091 1,122 1,150 4,882 10,364

1,179 1,245 1,297 1,352 1,429 1,511 1,601 1,694 1,806 1,880 2,011 2,142 7,190 16,724

153 155 180 220 257 282 302 318 330 338 340 343 1,241 2,911 ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ _____ _____

2,158 2,295 2,413 2,528 2,659 2,791 2,924 3,057 3,211 3,309 3,473 3,635 13,314 29,998

On-budget 1,795 1,911 2,014 2,120 2,237 2,355 2,472 2,586 2,721 2,795 2,932 3,064 11,199 25,297

Off-budget 363 384 398 408 421 435 452 471 490 514 541 571 2,115 4,702

-375 -477 -363 -273 -274 -286 -281 -272 -176 -38 -34 -15 -1,477 -2,012

-536 -638 -537 -466 -482 -509 -519 -523 -439 -310 -314 -302 -2,513 -4,402

161 161 174 193 208 224 238 250 263 273 280 287 1,036 2,390

3,914 4,385 4,762 5,048 5,335 5,633 5,927 6,212 6,400 6,450 6,496 6,525 n.a. n.a.

10,829 11,469 12,091 12,682 13,236 13,862 14,519 15,187 15,862 16,562 17,301 18,070 66,389 149,371

Off-budget

Debt Held by the Public

Memorandum:

Gross Domestic Product

Revenues

Individual income taxes

Corporate income taxes

Social insurance taxes

Other

Total

Outlays

Discretionary spending

Mandatory spending

Net interest

Total

Surplus or Deficit (-) 

On-budget 

7. See Department of the Treasury, Financial Report of the United 

States Government (February 27, 2004), for the 2003 report.
4 MEASURES OF THE U.S. GOVERNMENT’S FISCAL POSITION UNDER CURRENT LAW

mulgated by the Federal Accounting Standards Advisory 

Board (FASAB) and consolidates the reports of individual 

federal agencies.8 It consists of multiple statements, including a balance sheet and statements of the government’s operations and net cost; extensive disclosures, in 

the “Stewardship Information” section, about social insurance programs (especially Social Security and Medicare) and so-called stewardship land (such as wilderness 

areas and national forests); notes to the statements, which 

summarize significant accounting policies and provide 

more details on particular categories of assets and liabilities; and a discussion and analysis of the financial results 

for the reporting period.

The Balance Sheet: Assets and Liabilities. The balance 

sheet, one of the major statements in the financial report, 

indicates the government’s financial condition through 

the assets it owned or controlled as well as through the liabilities it owed at the end of the reporting period (see 

Table 2). Because the balance sheet summarizes the results of all resource flows to date (in the form of assets 

and liabilities), it is often considered the best source of information on the government’s holdings of monetary assets and noncash items (such as accounts receivable), inventories, property, structures, and equipment. The 

statement also reports liabilities (for example, debt held 

by the public, pension liabilities, and environmental 

and disposal liabilities) in accordance with FASABpromulgated standards. 

The balance sheet does not include all federal assets and 

foreseeable outflows of resources. Specifically, some government assets are not considered spendable resources, 

and many of the government’s potential commitments do 

not meet the high threshold requirements for a recorded 

asset or liability. As an example, the asset side of the balance sheet currently omits vast holdings of public land.9

However, the financial report provides information on a 

broader range of claims in other parts of the document. 

For example, the balance sheet does not include payments for Social Security and Medicare until they are due 

and payable because these do not represent a current liability—current law may be changed to alter future payments. However, projected payments are reported in the 

special section on the government’s so-called stewardship 

responsibilities. Nor does the balance sheet encompass 

contingent liabilities for losses that may occur in federal 

insurance programs. Information on those potential costs 

is provided either through notes to the statements or as 

required supplemental data. 

In keeping with its focus on the financial effects of events 

that have already occurred, the balance sheet also omits 

what many regard as the government’s most valuable “asset”: its power to levy taxes. Future tax receipts (excepting 

those that currently constitute a “receivable,” in accounting terms) are omitted because they do not meet FASAB’s 

definition of an asset—which requires not only the likelihood of future economic benefit but a past event that 

conveyed ownership or control to the reporting entity. 

Thus, future income tax revenues are not counted as an 

asset to the government until taxable income is earned 

and taxes on it are collectible.10

The government’s net position can be positive (more assets than liabilities) or negative (more liabilities than assets). At the end of 2003, the government’s reported net 

position was an excess of liabilities over assets of $7.1 trillion, largely reflecting the government’s borrowing to finance accumulated deficits and its accrued liabilities for 

federal employees’ and veterans’ benefits (see Table 2). As 

a percentage of GDP, the government’s net position represented about 66 percent. By contrast, the budget’s main 

measure of indebtedness—government debt held by the

8. The Department of the Treasury, OMB, and the Government 

Accountability Office established FASAB in 1990 to develop 

accounting standards and principles for the federal government.

9. The Office of Management and Budget also produces a federal 

balance sheet; for 2003, it valued federal land at $553 billion and 

mineral rights at $649 billion. See Budget of the United States Government, Fiscal Year 2005: Analytical Perspectives, Table 12-1, p. 

188. In addition, although the land’s value is not “booked” 

(recorded on the asset side of the balance sheet), federal accounting standards require information on the number of acres of land 

held and descriptions of so-called heritage assets (such as monuments, museums, and historical sites). See Financial Report of the 

United States Government (February 27, 2004), pp. 94-97. 

10. Revenues are recognized once a legally enforceable claim exists 

and the collection is probable and measurable. The accounting 

method used for taxes is a modified cash-basis method rather than 

one with an accrual basis. See Federal Accounting Standards Advisory Board, Accounting for Revenue and Other Financing Sources 

and Concepts for Reconciling Budgetary and Financial Accounting, 

Statement of Federal Financial Accounting Standards No. 7 (May 

10, 1996), paragraphs 5, 6, and 46-49.
MEASURES OF THE U.S. GOVERNMENT’S FISCAL POSITION UNDER CURRENT LAW 5

Table 2.

The Federal Government’s Balance Sheet, 2002 and 2003

(Billions of dollars)

Source: Congressional Budget Office based on Department of the Treasury, Financial Report of the United States Government (updated 

March 30, 2003), p. 58; Financial Report of the United States Government (February 27, 2004), pp. 62 and 123; and unpublished 

data from the Treasury’s Financial Management Service.

Note: The balance sheets are figured as of September 30, the end of the government’s fiscal year.

a. Reported on a net basis.

b. The amount for 2002 excludes the Department of Defense’s holdings.

c. The category’s title is somewhat misleading because the total for 2003 includes amounts for items such as retirement benefits owed to 

contractors working for the Department of Energy ($9.8 billion) and to the District of Columbia’s teachers, police, and firemen ($8.3 billion).

public and reported on a cash-flow basis—totaled $3.9 

trillion, or 36 percent of GDP.

Even though the federal balance sheet bears a strong resemblance to that of a private company, the interpretation of the government’s net position differs significantly 

from that of net equity, the corresponding measure for a 

private firm. A private firm with negative equity is insolvent. Because a sovereign government that retains its 

power to tax can continue to operate indefinitely, the 

government’s net position indicates the extent to which 

the cost of past government activities will have to be paid 

in the future.

Net Operating Cost. The financial report uses the “Statements of Net Cost” and the “Statements of Operations 

and Changes in Net Position” to report how the government’s financial position has been affected by the income 

2002 2003

Assets

Cash and Monetary Assets 141.6 119.6

Receivables

Accountsa 32.0 33.8

Loansa 219.2 221.1

Taxes 21.4 22.9

Inventories and Related Propertya,b 192.2 241.2

Property, Structures, and Equipmenta,b 324.7 658.2

Other Assets 65.4 97.1

Total Assets 996.5 1,393.9

Liabilities

Accounts Payable 55.8 62.2

Debt Held by the Public and Accrued Interest 3,573.2 3,944.9

Federal Employee and Veterans’ Benefits 3,589.4 3,880.0

Environmental and Disposal Liabilities 273.0 249.9

Social Insurance and Other

Benefits Due and Payable 95.3 100.0

Insurance Programsc 53.9 69.9

Loan Guarantees 28.1 34.6

Other Liabilities 148.0 157.1

Total Liabilities 7,816.7 8,498.6

Net Position (Assets minus liabilities) -6,820.2 -7,104.7

Total Liabilities and Net Position 996.5 1,393.9
6 MEASURES OF THE U.S. GOVERNMENT’S FISCAL POSITION UNDER CURRENT LAW

it received and the expenses it incurred during the reporting period. Just as the budget deficit is linked numerically 

and conceptually to changes in debt held by the public, 

the government’s net operating cost for a particular 

year—after some minor adjustments—is the change in 

the government’s net position. Because losses on the 

statements of net cost will result in either a reduction in 

assets or an increase in liabilities, the amount of the loss 

equals the decrease in assets plus the increase in liabilities. 

(The reverse is true for operating gains.)

Like the balance sheet, the government’s net operating 

cost (which can also be expressed as revenues minus the 

net cost of operations) reflects a broad range of resources. 

For example, the net operating cost includes as expenses 

pensions and other postretirement benefits that were 

earned by federal military and civilian employees during 

the reporting period, increases in federal liabilities for environmental cleanup operations, and the depreciation of 

assets. Nevertheless, because the purpose of the net operating cost measure is to represent only recognizable, or 

“bookable,” income and costs, the measure falls short of 

being comprehensive.11 For example, it recognizes no 

costs for contingent liabilities related to disasters or acts 

of terrorism beyond the amounts actually incurred during 

the reporting period and no revenues from taxes on income earned in the period that are not yet owed by taxpayers. 

Because the government’s financial statements take in 

some accrued as well as current expenses, a significant 

share of the costs being reported in the net operating 

measure is related to activities conducted in earlier periods. Specifically, current expenses in this context reflect 

benefits earned in the current period, interest on benefits 

earned in previous periods, and reestimates of the cost of 

benefits earned in past periods. For example, in 2003, the 

total expense reported for federal pensions was $152 billion, and the amount reported for federal retiree health 

insurance was $135 billion. The cost of federal employees’ deferred compensation earned during the year was 

$39 billion for pensions and $21 billion for retiree health 

insurance.12 Interest on retirement-related liabilities was 

$115 billion for pensions and $52 billion for retiree 

health benefits, and actuarial adjustments (to correct for 

discrepancies between estimated and actual results) increased federal liabilities for pensions by $2 billion and 

retiree health benefits by $62 billion. Thus, the currentservices component of those costs (the amount representing costs for 2003—$60 billion) was only about 20 percent of the total costs ($287 billion).

The net operating cost reported in the financial statements for fiscal year 2003 was $665 billion. That measure can be reconciled with the budget’s summary measure—the surplus (or deficit), which was $375 billion in 

2003—by taking into account increases in liabilities for 

future payments of military pensions and retiree health 

benefits, veterans’ compensation, and the pensions and 

retiree health benefits of federal civilian employees, which 

the budget does not currently include. That reconciliation is carried out in the financial report (see Table 3).13

As a general rule, the additional accruals that are not part 

of the budget make it likely that any shortfall indicated in 

the financial report’s statements of operations will be 

larger than the budget deficit. 

Long-Term Budget Projections

The use of an extended budgetary planning horizon (for 

example, five- and 10-year periods rather than one year) 

allows policymakers to see more of the consequences of 

current policy decisions, which may better align those decisions with longer-term budgetary goals. For the same 

reason, some policymakers prefer even longer-term projections, including those with 50- to 100-year spans.14

CBO and OMB both produce long-term estimates, 

which are based on assumptions about the continuation 

of current laws, long-run rates of productivity and growth 

of the labor force, and alternative paths for several variables: medical costs (in the Medicare and Medicaid programs), other mandatory spending (including Social Security and unemployment insurance), and defense and 

nondefense discretionary spending. Such projections are 

11. If an asset (or liability) is “bookable,” it can be recorded on the 

asset (or liability) side of the balance sheet according to guidance 

provided by the Federal Accounting Standards Advisory Board.

12. Deferred compensation is the portion of employees’ compensation for services (hours of labor)—in the form of pensions and 

retiree health benefits—that employees receive at a later date in 

addition to their current salary and health benefits.

13. See Department of the Treasury, Financial Report of the United 

States Government (February 27, 2004), p. 60.

14. For the latest such projections, see Congressional Budget Office, 

The Long-Term Budget Outlook (December 2003); and Budget of 

the United States. Government, Fiscal Year 2005: Analytical Perspectives, pp. 190-200. 
MEASURES OF THE U.S. GOVERNMENT’S FISCAL POSITION UNDER CURRENT LAW 7

Table 3.

Reconciling Net Operating Cost and the Budget Surplus or Deficit,

2001 Through 2003

(Billions of dollars)

)

Source: Congressional Budget Office based on data from Department of the Treasury, Financial Report of the United States Government 

(updated March 30, 2003), p. 56; and Financial Report of the United States Government (February 27, 2004), p. 60.

Note: Net operating cost is the annual change in the government’s net financial position (the difference between its assets and liabilities).

a. Includes insurance programs, the Exchange Stabilization Fund, and contractual services as well as other miscellaneous programs.

b. Costs from federal operations that are known to result in hazardous waste and that the federal government is required, by statute or regulation, to clean up.

c. Covers a variety of components, including tax receivables, increases in benefits due and payable, accounts payable, prior-period adjustments, and increases in other assets and inventory. Some of those components are included in the budget deficit but not in net operating 

cost in the government’s financial statements.

now included in both the Administration’s annual budget 

documents and in the information provided in the government’s financial report.

Long-term budget projections provide a different outlook 

on the government’s fiscal position from the one offered 

in the balance sheet primarily because they project future 

tax collections and expenditures. Such projections forecast cash inflows and outflows for all current programs 

and policies under current law as far into the future as is 

thought useful. Another strength of long-term budget 

projections is that they show the path of future fiscal imbalances over time, which is useful in designing remedial 

policies. 

Many analysts who prepare long-term budget projections 

indicate the uncertainty attached to those future-year 

numbers. Because that uncertainty has many sources, 

such analyses typically show projected spending and revenues under current law using a variety of assumptions. 

Perhaps most obviously, uncertainty arises in projecting 

future economic conditions, which profoundly affect 

both receipts and outlays; thus, the analyses usually attempt to reveal the effect of changing assumptions about 

the economy. In addition, because the Congress determines discretionary spending in its annual appropriation 

bills and its decisions are difficult to foresee, long-term 

projections must incorporate an assumed path for that 

type of spending. OMB in its long-term projections, for 

instance, assumes that discretionary spending will grow 

with inflation and, alternatively, with nominal GDP.

2001 2002 2003

Total Budget Surplus or Deficit (-) 127.0 -157.7 -374.8

Increase in Liabilities

Military pensions and health benefits -406.8 -32.4 -101.1

Veterans’ compensation -139.3 -157.3 -105.6

Federal civilian pensions and health benefits -50.1 -38.9 -79.9

Othera -13.1 -13.8 -25.1

Subtotal -609.3 -242.4 -311.7

Change in Environmental and Disposal Liabilitiesb -5.7 33.8 23.1

Depreciation Expense -21.4 -20.5 -71.2

Budget Deficit Components Not in Net Operating Cost

Fixed asset purchases 34.4 40.9 102.0

Repayments on the principal of loans made before credit reform -19.9 -8.2 -9.1

Otherc -19.9 - 10.8 -23.3

Subtotal -5.4 21.9 69.6

Net Operating Cost -514.8 -364.9 -665.0
8 MEASURES OF THE U.S. GOVERNMENT’S FISCAL POSITION UNDER CURRENT LAW

Figure 1.

Total Surplus or Deficit Under CBO’s Long-Term Budget Scenarios

(Percentage of GDP)

Source: Congressional Budget Office.

Note: This figure was adapted from CBO’s The Long-Term Budget Outlook (December 2003). For more information about the scenarios, see 

Table A-1 and Chapter 1 in that report. All scenarios, which were computed without taking economic feedbacks into account, assume 

that after 2012, taxation levels remain at 18.4 percent of GDP. 

The growth of costs for the government’s major health 

care programs is also a substantial source of budgetary 

uncertainty. CBO includes alternative paths in its longterm projections that show, for example, total federal 

spending for Medicare and Medicaid in 2050 ranging 

from 6.4 percent of GDP to more than 21 percent, up 

from 3.9 percent in 2003.15

As with traditional budgetary analyses, a key indicator of 

the federal government’s overall fiscal position is the gap 

between revenues and outlays over time—that is, the surplus or deficit. CBO’s recent long-term budget analysis 

indicated that if overall taxation levels remained at 18.4 

percent of GDP after 2012, the gap might grow from 3.5 

percent of GDP in 2003 to as much as 35 percent in 

2050. Alternatively, the budget could produce a surplus, 

depending on the assumed course of federal spending (see 

Figure 1). 

Another important indicator of the government’s financial condition is federal debt held by the public. Under 

the surplus/deficit paths illustrated in Figure 1, federal 

debt could grow from 36 percent of GDP in 2003 to a 

multiple of GDP in 2050 (see Figure 2). Or, depending 

on the projections’ underlying assumptions about the future course of federal spending, federal debt could trend 

down to zero. 

Summary Present-Value Measures

In general, present-value measures translate a projection 

of long-term cash flows into one number that reflects the 

time value of money—but they may differ in their specifics. Some may deal with cash flows over different periods, 

such as 50 years or even an “infinite horizon,” incorporating the assumption that current law continues indefinitely. Other measures may focus only on liabilities; still 

others, on both assets and liabilities (in so-called “fiscal 

imbalance” measures). 

Notwithstanding such differences, the creation of all 

present-value measures follows essentially the same twostep process. First, analysts calculate future cash flows for 

a specific program or set of programs (such as the cash

1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

High-Spending

Scenario

Low-Spending

Scenario

Medium-Spending

Scenario

Actual Projected

15. For additional detail, see Congressional Budget Office, The LongTerm Budget Outlook.
MEASURES OF THE U.S. GOVERNMENT’S FISCAL POSITION UNDER CURRENT LAW 9

Figure 2.

Federal Debt Held by the Public Under CBO’s Long-Term Budget Scenarios

(Percentage of GDP)

Source: Congressional Budget Office.

Note: This figure was adapted from CBO’s The Long-Term Budget Outlook (December 2003). For more information about the scenarios, see 

Table A-1 and Chapter 1 in that report. All scenarios, which were computed without taking economic feedbacks into account, assume 

that after 2012, taxation levels remain at 18.4 percent of GDP.

flows provided in long-term budget analyses). Second, 

they discount the value of that spending (or revenues, or 

both) over a specific period to produce one number. A 

discount rate is applied to the annual cash flows to determine their present value because people place less value 

on a dollar in the future than they do on one in the 

present. Consequently, a dollar today is worth more to 

them than a dollar tomorrow.

One commonly used summary measure is the fiscal imbalance of the federal government over an infinite horizon. That measure, which is the present value of all federal fiscal shortfalls for all programs relative to the present 

value of GDP, indicates the general extent of the gap. 

One recent study, for example, calculated a fiscal imbalance of $45.5 trillion, or 6.5 percent of the present value 

of GDP (see Table 4 on page 10).16

Most (5.4 percent of the present value of GDP) of the fiscal imbalance estimated in that study was attributable to 

Medicare and reflects how much the program’s spending 

is expected to exceed the receipts earmarked for it. One 

reason that the imbalance for Medicare was so large is 

that the premiums paid by recipients cover only 25 percent of benefits for Part B, Medicare’s Supplementary 

Medical Insurance. Another contributing factor was the 

cost of the President’s proposal for prescription drug coverage as it was presented in the 2004 budget ($6.1 trillion, using the study’s infinite-horizon approach). That 

cost raised the estimated imbalance by about 1 percent of 

1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

-100

-50

0

50

100

150

200

High-Spending

Scenario

Low-Spending

Scenario

Actual Projected

Medium-Spending

Scenario

16. Jagadeesh Gokhale and Kent Smetters, Fiscal and Generational 

Imbalances: New Budget Measures for New Budget Priorities (Washington, D.C.: AEI Press, 2003). The calculation used OMB’s economic assumptions and the Social Security Administration’s 

demographic assumptions and interpreted current policies as 

including the President’s proposals in his budget request for 2004. 

Gokhale and Smetters’ results indicated that under their assumptions, restoring fiscal balance would require an immediate and 

permanent payroll tax hike of 16.6 percentage points, a two-thirds 

increase in income taxes, or a cut of 45 percent in Social Security 

and Medicare benefits. Delaying implementation of those measures would increase the size of the necessary adjustments. 
10 MEASURES OF THE U.S. GOVERNMENT’S FISCAL POSITION UNDER CURRENT LAW

Table 4.

Sensitivity of Fiscal Imbalance Measures to Different 

Discount Rates and Growth Assumptions

(Percentage of the present value of GDP)

Source: Congressional Budget Office based on Jagadeesh Gokhale and Kent Smetters, Fiscal and Generational Imbalances: New Budget 

Measures for New Budget Priorities (Washington, D.C.: AEI Press, 2003), Table 5, p. 39; and unpublished data supplied by 

Jagadeesh Gokhale. 

Note: The present value of GDP over an infinite horizon was $699.07 trillion in 2003, according to Gokhale and Smetters.

a. The midrange assumption for the discount rate was 3.6 percent, the high assumption was 3.9 percent, and the low assumption was 3.3 

percent.

b. The midrange assumption for GDP growth per capita was 1.7 percent, the high assumption was 2.2 percent, and the low assumption was 

1.2 percent.

c. The midrange assumption for the “excess” growth of health care outlays per capita (the difference between the annual growth of outlays 

for Medicare and Medicaid per capita and the annual growth of GDP per capita) was 1.0 percent, the high assumption was 1.5 percent, 

and the low assumption was 0.5 percent.

d. Based on current policy in 2003 and the policies proposed in the President’s 2004 budget request, including the Administration’s plan for 

a Medicare prescription drug benefit.

the present value of GDP.17 (The proposal was enacted, 

with some modifications, as the Medicare Prescription 

Drug, Improvement, and Modernization Act of 2003, 

Public Law 108-173.)18

Such measures, however, are particularly sensitive to assumptions about the growth of productivity, the growth 

of Medicare costs, and the discount rate used to convert 

those future cash flows to present values. The assumption 

about cost increases for Medicare is the most critical influence. Consider an assumption that health care outlays 

per beneficiary will grow 1.0 percent faster than real (inflation-adjusted) GDP per capita through 2080. Adjusting that rate down or up by 0.5 percent would result in a 

total fiscal imbalance, under the assumptions of the 

Gokhale-Smetters study, that ranged from 4.3 percent of 

the present value of GDP to 9.4 percent (see Table 4). 

Fiscal Imbalance Under

Midrange Assumptions Alternative

Alternative GDP 

Growth Rates

Alternative Growth 

Rates of Health Care 

Billions of Percentage Discount Ratesa per Capitab Outlays per Capitac

 2002 Dollars of GDP High Low High Low High Low

Social Security 7,204 1.0 0.9 1.2 1.2 0.9 1.0 1.0

Medicared 37,590 5.4 4.9 6.0 6.7 4.5 7.3 3.9

All Other Federal 

Programs 676 0.1 0.1 0.1 -2.3 1.7 1.0 -0.6

Total Fiscal

Imbalance 45,470 6.5 5.9 7.3 5.7 7.1 9.4 4.3

17. See the statement of Joseph Antos and Jadadeesh Gokhale, American Enterprise Institute, “The Cost of Adding a Prescription 

Drug Benefit to Medicare,” before the Subcommittee on Human 

Rights and Wellness of the House Committee on Government 

Reform, July 17, 2003; and Joseph Antos and Jagadeesh Gokhale, 

“A Benefit That Is Bad for America’s Health,” Financial Times, 

June 20, 2003.

18. Actuaries for the Medicare program estimate that the prescription 

drug benefits established by the Medicare Modernization Act will 

raise expenditures by 2.4 percent of GDP over an infinite horizon 

and that premiums will cover an amount equal to 0.4 percent of 

GDP. The remainder will be covered by general revenues (1.8 percent of GDP) and state transfers (0.2 percent). The actuaries also 

project a fiscal gap of 2.4 percent of GDP for Medicare’s hospital 

insurance program (Part A) and 2.5 percent for its Supplementary 

Medical Insurance (Part B). See Boards of Trustees, Federal Hospital Insurance and Federal Supplementary Medical Insurance 

Trust Funds, 2004 Annual Report, pp. 60-61, 99-100, and 108-

109. 
MEASURES OF THE U.S. GOVERNMENT’S FISCAL POSITION UNDER CURRENT LAW 11

Small changes in the discount rate will also generate large 

swings in the overall fiscal imbalance measure. Lowering 

the discount rate from 3.6 percent to 3.3 percent, for example, would increase the total imbalance from 6.5 percent of the present value of GDP to 7.3 percent.

Future Program Costs, Contingent

Liabilities, and Unfunded Liabilities

The provision in the budget resolution identified three 

specific aspects of the government’s financial position—

the future costs of current programs, contingent liabilities, and so-called unfunded liabilities—that have generated concerns about the adequacy and transparency of the 

information provided in current budgetary and accounting reports. 

The three specific concerns noted in the provision differ 

significantly in concept and potential magnitude. The future costs of some programs are a significant source of 

growth in the demand for government resources. Contingent liabilities (which also arise from current programs or 

activities) are likely to contribute much less to that 

growth, but they are particularly difficult to predict in 

both their magnitude and timing. Unfunded liabilities attempt to quantify the gap between the future costs of current programs and the resources that are expected to be 

available to fund those costs. Their magnitude reflects the 

scope of programs and resources included in the calculation.

Future Costs of Current Programs 

Some large federal programs entail cash flows for as long 

as current law is unchanged. Near-term flows are captured in the government’s five- and 10-year budgets, and 

long-term flows are shown in projections that can look 

100 years or more into the future. CBO, in its December 

2003 report The Long-Term Budget Outlook, analyzed six 

different budgetary scenarios and projected that future 

federal spending as a percentage of GDP (excluding interest payments on debt held by the public) could range 

from 17 percent to 33 percent in 2050, versus 18.5 percent in 2003. That report concluded that “unless taxation 

reaches levels that are unprecedented in the United States, 

current spending policies will probably be financially unsustainable over the next 50 years.”

Medicare is the source of the largest potential growth and 

the most uncertainty among current programs because 

much of its spending is driven by the costs of medical 

care. Those costs have been rising for the past 40 years at 

a pace significantly faster than that of inflation. Depending on the assumptions made about the future path of 

health care spending, projected costs can vary greatly. 

CBO estimates that Medicare expenditures could rise 

from approximately 2 percent of GDP in 2003 to between 5 percent and 17 percent in 2050 (see Figure 3).

Social Security is also a significant source of future spending growth, but the future increase is likely to be smaller 

and more predictable than that for Medicare. CBO 

projects that expenditures for Social Security will grow 

from 4.4 percent of GDP in 2003 to more than 6 percent 

in 2030 (see Figure 4) and to nearly 7 percent by 2100.

The government’s financial report also contains selected 

summary measures of those costs. The social insurance 

statement included in the financial report for 2003 describes $26.9 trillion in social insurance responsibilities—

$11.7 trillion attributable to Social Security and $15.0 

trillion to Medicare (see Table 5).19 Those commitments 

are reported on a 75-year closed-group basis—that is, 

they represent present-value estimates of benefits in excess 

of contributions and earmarked taxes for participants 

who were at least 15 years of age at the start of the period. 

(Specifying the age in that way makes it a “closed” group; 

an “open” group would include everyone alive during the 

75-year span.)

Two concerns are sometimes voiced about the usefulness 

of those data on future costs: their uncertainty and the 

difficulty in interpreting them. The uncertainty arises 

from the problems involved in developing such projections—specifically, in accurately forecasting over many 

decades such things as underlying economic conditions, 

relevant global events, and demographic and other factors. Some analyses of long-term program costs attempt 

to properly quantify the level of uncertainty associated 

with the estimates. The broad range of the uncertainty 

confirms the lack of precision of the particular estimates 

but does not negate the information regarding the scale of 

long-term spending pressures. Summary present-value 

measures may obscure that uncertainty by discounting 

19. That estimate for Medicare preceded the most recent report of the 

Medicare trustees, which contains their first estimate of the 75-

year cost of the new prescription drug benefit (Part D of Medicare). See Board of Trustees, Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, 2004 Annual 

Report.
12 MEASURES OF THE U.S. GOVERNMENT’S FISCAL POSITION UNDER CURRENT LAW

Figure 3.

Medicare Spending Under Current Law

(Percentage of GDP)

Source: Congressional Budget Office.

Note: This figure was adapted from CBO’s The Long-Term Budget Outlook (December 2003). For more information about the scenarios, see 

Table A-1 and Chapter 1 in that report. Excess cost growth, figured on an average annual basis, is growth in Medicare’s costs per 

enrollee above the rise in GDP per capita.

those flows—using arbitrary discount rates—to a single 

number. 

Interpreting summary measures of costs—which for the 

largest government programs often reach trillions of dollars—can also be quite challenging because many of the 

measures do not include information about the resources 

that will be available to pay those costs. One solution is to 

compare the costs with GDP, which represents the economic resources available for public as well as private activities. 

Contingent Liabilities 

The federal government provides explicit and implicit insurance coverage against the failure of banks and pension 

plans, against property and casualty losses from terrorism 

and natural disasters, and against crop failures—to name 

some of the largest programs. The budget recognizes the 

losses from those events, or “contingencies,” when cash 

outlays—in the form of insurance or other kinds of payments—are made. Foreseeable losses are recognized in the 

government’s financial statements as liabilities if the losses 

have already been triggered by past events. However, contingent liabilities, which lack such a trigger, appear in the 

financial report not as line items but as notes.

Although a large body of information exists for some 

contingencies, the various measures of the government’s 

total potential liabilities are incomplete in two primary 

areas. First, the measures do not include certain categories 

of contingent liabilities, such as the government’s expected responses to large natural disasters (for example, 

earthquakes and floods) or the risks associated with government-sponsored enterprises (such as Fannie Mae and 

Freddie Mac). Second, the manner in which the federal 

government calculates contingent liabilities may be too 

limited—especially in its neglect of the cost of risks related to changing economic conditions. (Private estimates 

routinely factor such risks into their measures of contingencies.) Efforts, including some by CBO, are currently 

under way to develop means of systematically valuing the 

potential losses from some of those contingencies.

1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

0

2

4

6

8

10

12

14

Excess Cost Growth

of 2.5%

Actual Projected

Excess Cost Growth

of 1%

No Excess Cost Growth
MEASURES OF THE U.S. GOVERNMENT’S FISCAL POSITION UNDER CURRENT LAW 13

Figure 4.

Social Security Spending and Revenues Under Current Law

(Percentage of GDP)

Source: Congressional Budget Office.

Note: The dark lines indicate CBO’s projections of expected outcomes, and the shaded areas show ranges of uncertainty around each projection. For more discussion, see Congressional Budget Office The Outlook for Social Security (June 2004).

a. Scheduled benefits and administrative costs.

b. Payroll taxes and revenues from the taxation of benefits.

Reported Contingent Liabilities. As the budget shows, 

federal insurance programs report net inflows of cash 

(mainly from premiums) in most years; however, the programs also represent a large contingent liability. Some of 

the expected losses from insurance programs are recorded 

in the budget but only those for which cash payouts are 

expected during the period that the budget covers.20

More generally, under the budget’s cash flow accounting, 

insurance programs appear to be costly only in past “bad” 

years (years with a high level of claims) and profitable in 

past good years. The budget also reports contingent liabilities for loan and other credit programs. However, with 

the exception of credit programs, unless a specific cash 

flow or subsidy can be identified or reliably predicted for 

a specific contingent liability, the total liability or risk will 

generally not be recognized in the budget.

The federal financial statements and their accompanying 

notes disclose information about the government’s outstanding commitments and contingent liabilities. Commitments include legal obligations for the cost of operations and capital leases, undelivered orders, and callable 

1985 1995 2005 2015 2035 2025 2045 2055 2065 2075 2095 2085

0

4

3

5

6

7

8

9

10

Actual Projected

Outlaysa

Revenuesb

20. The expected future cost of federal insurance programs is reported 

in Budget of the United States Government, Fiscal Year 2005: Analytical Perspectives, pp. 92-97.
14 MEASURES OF THE U.S. GOVERNMENT’S FISCAL POSITION UNDER CURRENT LAW

Table 5.

Social Insurance and Other Federal Commitments, 2001 Through 2003

(Billions of dollars)

Source: Congressional Budget Office based on Department of the Treasury, Financial Report of the United States Government (updated 

March 30, 2003), pp. 6 and 120; and Financial Report of the United States Government (February 27, 2004), pp. 12, 64, and 130. 

Note: Responsibilities and commitments are figured as of September 30, the end of the government’s fiscal year.

a. Numbers are the present value of 75-year projections of benefit payments in excess of contributions and earmarked taxes for participants 

who were at least 15 years of age at the start of the period.

b. These estimates preceded the most recent report of the Medicare trustees and so exclude 75-year costs for the new prescription drug 

benefit (Part D).

c. Includes Railroad Retirement, Black Lung, and unemployment insurance payments.

d. Includes commitments for certain activities of the Department of Agriculture, the National Oceanic and Atmospheric Administration's satellites and weather systems, the Tennessee Valley Authority, and the Department of Transportation.

capital for multilateral development banks such as the 

World Bank.21 Contingent liabilities include projected 

costs for pension and deposit insurance. To be recorded 

in the notes to the financial statements, contingent losses 

need to be “reasonably possible” (the likelihood of loss is 

less than 50 percent but more than “remote”).22 The federal government reported $112 billion of contingent liabilities for 2003. Of that total, $93 billion was attributable to federal insurance programs and $9 billion to 

unadjudicated claims against the government (see Table 

6).

Consistent with their long-term commitments, the government’s two largest insurance programs, the Pension 

Benefit Guaranty Corporation (PBGC) and the Federal 

Deposit Insurance Corporation (FDIC), have financial 

statements that generally provide a longer-term perspective.

Pension Benefit Guaranty Corporation. PBGC insures 

most defined-benefit pension plans sponsored by private 

2001 2002 2003

Social Insurancea

Social Security 10,542 11,215 11,742

Medicareb

Part A 6,012 6,409 7,287

Part B 6,471 6,487 7,719

Otherc 35 38 110

 Subtotal 23,060 24,149 26,858

Additional Commitments

Undelivered orders 498 539 596

Multilateral development banks 69 70 62

Long-term leases 49 50 47

Otherd 45 49 45

Subtotal 661 708 750

Total Social Insurance and

Other Commitments 23,721 24,857 27,608

21. Callable capital in this case takes the form of a commitment to 

supply capital to honor the debts of a multilateral development 

bank if the bank cannot otherwise meet its obligations. Thus far, 

no such capital has been supplied. See the statement of Douglas 

Holtz-Eakin, Director, Congressional Budget Office, The Cost and 

Budgetary Treatment of Multilateral Financial Institutions’ Activities,

before the Senate Committee on Banking, Housing, and Urban 

Affairs, May 19, 2004.

22. Office of Management and Budget, Accounting for Liabilities of the 

Federal Government, Statement of Federal Financial Accounting 

Standards No. 5 (December 1995), p. 11, paragraph 35, and p. 

13, paragraph 40. 
MEASURES OF THE U.S. GOVERNMENT’S FISCAL POSITION UNDER CURRENT LAW 15

Table 6.

Contingent Liabilities of the Federal Government, 2001 Through 2003

(Billions of dollars)

Source: Congressional Budget Office based on Department of the Treasury, Financial Report of the United States Government (updated 

March 30, 2003), p. 121; and Financial Report of the United States Government (February 27, 2004), p. 129.

a. In 2003, the largest contributor to this category was $10.3 billion for the Department of Defense’s (primarily, the Army’s) environmental 

and disposal contingencies.

b. Includes losses that are “reasonably possible, more than remote but less than probable.” (The federal government’s balance sheet and 

statement of net cost report losses that are probable.) The amounts shown are not offset by future premiums.

employers. Its financial report discloses contingent liabilities for large pension plans sponsored by financially weak 

firms—firms whose credit rating is below the minimum 

necessary to consider their debt “investment grade.” At 

the end of 2003, those contingent liabilities totaled $86 

billion, a sharp rise from the $35 billion reported for 

2002.23 And unless the business prospects of the troubled 

firms improve, PBGC’s liabilities at the end of 2004 

could be significantly greater than those recorded for 

2003 (see Box 1). CBO estimates in its 10-year budget 

projections that PBGC’s benefit payments will total close 

to $50 billion over the 2005-2014 period and that the 

agency’s receipts from premiums, interest, and assets of 

terminated plans will total $36 billion.

Federal Deposit Insurance Corporation. The FDIC insures 

deposits in commercial banks and savings associations. 

Contingent liabilities for the FDIC are reported for cases 

in which it has identified a troubled institution with an 

elevated risk of losses. As of December 31, 2003, the 

agency was reporting contingent liabilities of $2.3 billion 

for banks and $0.2 billion for thrift institutions (for example, savings and loans and mutual savings banks).24

Thus, the FDIC does not foresee a significant risk of 

multiple large-bank failures. 

Omitted Contingencies. A number of potentially large 

contingent liabilities are not included in the measures of 

the government’s financial position. Although no statutory requirement exists for most federal relief following 

natural disasters (such as large earthquakes and hurricanes), homeowners, small businesses, and state and local 

governments frequently anticipate and receive substantial 

federal assistance for uninsured losses following those 

events. After Hurricanes Andrew and Iniki in 1992, for 

example, the federal government provided more than 

$4.4 billion of assistance to the affected areas. Similarly, 

the region struck by the Northridge earthquake in 1994 

received $9.5 billion in aid.25 Yet federal financial reports 

record no contingent liabilities for large-scale federal disaster assistance. Nor do they include an amount representing the government’s exposure to possible losses 

through its provision of federal flood insurance, even 

though the government has contracted to provide reimbursements on insured properties in the event of 

2001 2002 2003

Insurance Programs

Pension Benefit Guaranty Corporation 11.0 35.5 85.6

Federal Deposit Insurance Corporation 7.0 7.3 5.9

Other insurance programs 0.1 0.5 1.0

Subtotal 18.1 43.3 92.5

Unadjudicated Claimsa 8.9 9.4 8.8

Otherb 21.4 17.3 11.1

Total Contingent Liabilities 48.4 70.0 112.4

23. Pension Benefit Guaranty Corporation, 2003 Annual Report 

(2004), pp. 33-34.

24. See Federal Deposit Insurance Corporation, 2003 Annual Report 

(2004), pp. 53-54, 75-76, 85, and 93-94. Note that these estimates of contingent liabilities are lower than those reported by the 

Treasury in the 2003 Financial Report. Part of the difference 

derives from different reporting dates, but most of it is attributable to the FDIC’s new method for estimating possible losses, 

which was adopted in December 2003. 

25. Congressional Budget Office, Federal Reinsurance for Disasters 

(September 2002), Table 5, p. 16. 
16 MEASURES OF THE U.S. GOVERNMENT’S FISCAL POSITION UNDER CURRENT LAW

Box 1.

The Balance Sheet for the Pension Benefit Guaranty Corporation

The financial statements of the Pension Benefit 

Guaranty Corporation (PBGC) and, in particular, its 

negative net position have alerted policymakers to a 

possible future burden on taxpayers from losses that 

have already been incurred. PBGC insures about 

$1.5 trillion in projected pension benefits in more 

than 30,000 defined-benefit plans.1

 As of 

September 30, 2003, PBGC reported liabilities of 

$45.3 billion—the present value of the benefits it 

guarantees for single-employer plans that have terminated or that are likely to be terminated (see the table to the right). Of that amount, $38.9 billion is attributable to pension plans that are controlled by 

trustees or already terminated and $5.2 billion is attributable to probable future terminations. In the 

past, about 80 percent of the plans classified as 

“likely to be terminated” have been. Those liabilities 

are reported on both PBGC’s and the federal government’s balance sheets. 

PBGC’s liabilities are partly offset by $34 billion in 

assets and receivables of the terminated plans that it 

is handling. (The agency’s balance sheet does not reflect future premium income.) PBGC’s net position 

is thus -$11.2 billion—a change of -$7.6 billion 

from 2002, when it reported a net position of -$3.6 

billion. That change is the accrual measure of 

PBGC’s costs (the measure recognizes transactions 

when they occur, whether or not cash changes 

hands) and is reported as a current expense in the 

federal financial statements. As recently as 2001, 

PBGC was reporting a positive net position of $7.7 

billion.2 Meeting PBGC’s commitment to insure 

pension benefits may lead to additional support by 

taxpayers if future premiums are insufficient to offset 

new liabilities.

PBGC’s Balance Sheet for

Single-Employer Plans as of

September 30, 2003

Source: Congressional Budget Office based on Pension Benefit Guaranty Corporation, 2003 Annual Report 

(2004), pp. 22-23.

a. Pending trusteeship.

1. Employment-based retirement plans that promise retirees a 

certain benefit upon retirement, regardless of the plan’s 

investment performance.

2. For an explanation of the factors contributing to PBGC’s 

worsening condition, see the statement of Steven A. 

Kandarian, Executive Director, Pension Benefit Guaranty 

Corporation, before the Senate Special Committee on 

Aging, October 14, 2003.

Item

Billions of 

Dollars

Assets

Cash and Cash Equivalents 3.2

Investments

Bonds 17.3

Equities 12.6

Other 0.1

Subtotal 30.0

Receivables 0.8

Total Assets 34.0

Liabilities

Present Value of Future Payments for:

Benefits

 Trusteed plans 38.9

Terminated plansa 0.5

Settlements and judgments 0.1

Claims for likely terminations 5.2

Subtotal 44.6

Other 0.6

Total Liabilities 45.3

Net Position -11.2

Total Liabilities and

Net Position 34.0
MEASURES OF THE U.S. GOVERNMENT’S FISCAL POSITION UNDER CURRENT LAW 17

flooding.26 Over the past 10 years, receipts of the flood 

insurance fund have ex-ceeded disbursements; the largest 

net outlay in any one year was $459 million, in 1995.

Another set of contingent liabilities that goes unreported 

is that for the financial risks posed by governmentsponsored enterprises—despite the federal government’s 

implicit guarantee of their obligations.27 The International Monetary Fund as well as other analysts contends 

that the enterprises’ capital may be insufficient to cover 

the risks that they are currently taking.28

Under some circumstances, the federal programs that are 

not disclosed as contingent liabilities in the financial 

statement notes could pose greater risks for taxpayers 

than those that are reported. On November 26, 2002, the 

federal government assumed much of the cost of 

terrorism-related property and casualty losses, but again, 

the financial statements reported no contingent liabilities 

related to that insurance. Specifically, the Terrorism Risk 

Insurance Act of 2002 requires the government to coinsure, or bear, 90 percent of all losses up to an annual cap 

of $100 billion after the insurance industry sustains specified losses—$12.5 billion in total losses in 2004, rising 

to $15 billion in 2005.29 (The program is set to expire at 

the end of 2005.) In 2002, CBO estimated that the law 

would increase direct spending by $6.3 billion and increase governmental receipts by $3.5 billion over the 

2003-2013 period.30 To date, no claims have been made 

under that program. The government currently charges 

no premiums for that coverage, but the Treasury is required to assess surcharges on policyholders after the 

losses to recover at least some of what it has paid out.

Another criticism of federal reporting is that the valuation of contingencies omits the cost of “market risk.” 

Market risk arises from future changes in overall economic conditions; it is not included in the budget, in the 

financial statements, or in other means of federal financial reporting because expected cash flows are converted 

to liabilities by applying a discount rate equal to the rate 

on Treasury debt. Market risk can affect many programs, 

including loan programs, the Pension Benefit Guaranty 

Corporation, and the multilateral financial institutions. 

Private valuations of equities and other financial instruments routinely include an estimate of market risk.31

Unfunded Liabilities

No federal obligation can be truly considered “unfunded” 

because of the government’s sovereign power to tax to 

meet its obligations. However, the term “unfunded liability” has been used to refer to gaps between the projected 

financial commitment to a program or expenditure and 

the earmarked revenues that are expected to be available 

to fund that commitment. In particular, certain budgetary terms—notably “trust funds” and “trust fund balances”—may create the impression that because those 

funds report positive holdings, future federal commitments are paid for. Moreover, the payment of certain 

taxes, especially payroll taxes for Social Security and 

Medicare that are credited to trust funds, may lead taxpayers to believe that they have “paid for” certain 

benefits.

Trust funds can be useful mechanisms for monitoring the 

balance between earmarked receipts and a program’s 

spending, but they are basically an accounting device, 

26. For estimates of risk that taxpayers bear for losses insured by the 

federal government’s flood insurance program, see the statement 

of JayEtta Z. Hecker, Director, Physical Infrastructure, General 

Accounting Office, before the Subcommittee on Housing and 

Community Opportunity of the House Committee on Financial 

Services, published as General Accounting Office, Flood Insurance: 

Challenges Facing the National Flood Insurance Program, GAO-03-

606T (April 1, 2003). 

27. See the statement of Douglas Holtz-Eakin, Director, Congressional Budget Office, Regulation of the Housing GovernmentSponsored Enterprises, before the Senate Commitee on Banking, 

Housing, and Urban Affairs (October 23, 2003); and Wayne Passmore, The GSE Implicit Subsidy and Value of Government Ambiguity, Finance and Economic Discussion Series Paper No. 2003-64 

(Board of Governors of the Federal Reserve System, December 

2003).

28. International Monetary Fund, Global Financial Stability Report: 

Market Development and Issues (Washington, D.C.: International 

Monetary Fund, September 2003), pp. 16-22.

29. For an analysis, see Jeffrey R. Brown and others, An Empirical 

Analysis of the Economic Impact of Federal Terrorism Reinsurance, 

Working Paper No. 10388 (Cambridge, Mass.: National Bureau 

of Economic Research, March 2004). 

30. For its cost estimate, CBO did not predict how much insured 

damage would be caused by terrorist attacks in any specific year. 

The agency’s estimate of the cost of financial assistance instead 

reflects how much the government might be expected to pay 

insurers on average. That average weighs the probabilities of various outcomes of possible future attacks, ranging from damages of 

zero up to very large amounts.

31. See Congressional Budget Office, Estimating the Value of Subsidies for Federal Loans and Loan Guarantees (August 2004).
18 MEASURES OF THE U.S. GOVERNMENT’S FISCAL POSITION UNDER CURRENT LAW

and their balances, even if “invested” in Treasury securities, provide the government with no resources for meeting future funding commitments.32 When those payments come due, the government must finance them in 

the same way that it finances other commitments—

through taxes or borrowing from the public. Thus, assessing the state of the federal government’s future finances 

requires measuring such commitments independently of 

their funding status.

The budget and the financial statements both provide information on the government’s total unfunded liabilities 

through their displays of the surplus (or deficit) and of 

the government’s net financial position, respectively. The 

budget and long-term budget projections also report the 

gap between revenues and expenditures for specific trustfund-related programs over time. For example, CBO 

projects that although the total revenue dedicated to the 

Social Security program will remain at approximately 5 

percent of GDP for the foreseeable future, program outlays will rise to over 6 percent of GDP by 2050, creating 

an annual gap of more than 1 percent of GDP at that 

time.33

Unlike long-term projections, measures of fiscal imbalance produce a single measure of the fiscal gap. (In order 

to calculate the difference between what costs are likely to 

be and the resources that will be available to meet them, 

such measures generally assume that taxation will remain 

at specified levels.) Some analysts estimate that the fiscal 

gap for the entire federal government today is between 

6.5 percent and 7.5 percent of the present value of 

GDP.34 Measures of fiscal imbalance can also be applied 

to a specific program (if one assumes that the program 

has a dedicated stream of revenues). For example, CBO 

estimates that a 100-year measure of the fiscal imbalance 

in the Social Security program is 0.5 percent of GDP.35

Such numbers are difficult to translate into policy prescriptions, however, because they do not reveal the pattern of expenditures over time. In cases in which costs are 

expected to increase over time, the fiscal imbalance measure of solvency relies heavily on the period selected for 

assessment. Various policies could be devised that would 

set the actuarial balance to zero over the next 30 to 50 

years, but they would leave a fiscal imbalance in subsequent years. Moreover, policies based on present-value 

measures may assume that future federal commitments 

can be paid for in advance by accumulating governmental 

receipts in advance of expenditures. However, earmarked 

receipts are an accounting device, and such receipts cannot truly be separated from other government finances 

and set aside for future expenditures. 

32. See Congressional Budget Office, Federal Debt and the Commitments of Federal Trust Funds, Long-Range Fiscal Policy Brief No. 4 

(revised May 6, 2003), and Acquiring Financial Assets to Fund 

Future Entitlements, Long-Range Fiscal Policy Brief No. 8 

(June 16, 2003). 

33. For more details, see CBO’s June 2004 report, The Outlook for 

Social Security.

34. The first estimate is from Gokhale and Smetters, Fiscal and Generational Imbalances. The second is from Alan J. Auerbach, William 

G. Gale, and Peter R. Orszag, “Reassessing the Fiscal Gap: The 

Role of Tax-Deferred Saving,” Tax Notes, vol. 100, no. 4 (July 28, 

2003), pp. 567-584. 

35. Congressional Budget Office, The Outlook for Social Security.