The Government's Hidden Assets

The govenment's budget deficit and its accumulated debt might seem like easy things to measure. However, as I explain extensively in Chapter 15 of my intermediate macro text, that is far from the case. A variety of subtle accounting issues make interpretation of the government's finances less than straightforward.

Here is a fact from yesterday's Wall Street Journal:

Americans are increasing the size of their retirement nest eggs at a good clip, despite concerns that the country as a whole isn't saving enough. Data to be published this week by the Investment Company Institute show that total U.S. retirement assets grew about $1 trillion between 2004 and 2005, to $14.3 trillion at the end of 2005.

What does this fact have to do with government accounting? Some of that $14.3 trillion is, in essence, a government asset.

Income taxes were deferred when money was put into those retirement accounts. When the money comes out, it will be taxed. In other words, as you invest the assets in your 401k plan, the government is your silent partner. If the tax rate is, say, 25 percent, then $3.6 trillion should arguably be added to the asset side of the government's balance sheet. If we assume a rate of return of 5 percent per year on those assets, then the government budget deficit is arguably overstated by $180 billion.

That is a large number. Unfortunately, this implicit asset is not nearly large enough to finance the budget problems that will arise when the baby-boom generatation retires. But it will help.

Two updates:

1. Stanford economist Michael Boskin got in some hot water a few years back pointing out the implicit govenment asset inherent in deferred taxes. Boskin made some calculation errors that overstated the size of this asset; he suggested a number around $12 trillion, compared to the $3.6 trillion above. Even if he got the number wrong, Boskin was right about the principle.

2. Today's NY Times reports the following about the tax bill that just passed Congress:

It would also allow taxpayers to roll any money in traditional retirement vehicles into Roth IRA's, where all the gains are tax-free. This provision is treated in the legislation as a revenue-raiser because in the first two years, a large number of people are expected to roll over their traditional retirement plans and pay taxes on the gains. But once the investments have been moved into the Roths, they will never again generate taxes.

This provision of the law takes some of the government's $3.6 trillion implicit asset and makes it explicit, by collecting the tax revenue now rather than later. As a result, the provision reduces the currently reported budget deficit. From the standpoint of the more relevant present-value budget constraint, however, it does not improve the government's fiscal imbalance.