A Primer on Measures of Government Financing Shortfalls and Liabilities

Abstract

This note presents measures of financing shortfalls and liabilities, both for an individual government program such as Social Security and for government financing as a whole. At the level of individual programs, the widely accepted measure of financing shortfall is the (infinite horizon) unfunded obligation, which is the present value of scheduled future benefits less the present value of the dedicated future tax revenues. At the aggregate level, a measure of financing shortfall is the fiscal imbalance, which is the total unfunded obligation of all government programs plus the debt held by the public. At the aggregate level, there is also a relative measure of financing shortfall, the fiscal gap. It is basically the fiscal imbalance divided by the present value of all of the future GDP. At both the individual and the aggregate level, a portion of the corresponding financing shortfall measure is due to past actions, and the rest is contingent on the continuation of the current policies in the future. The portion of the financing shortfall measure that is due to past actions provides a measure of liabilities for an individual program or the government financing as a whole.