Working Paper: NBER ID: w14427
Authors: Alexander W. Blocker; Laurence J. Kotlikoff; Stephen A. Ross
Abstract: Implicit government obligations represent the lion's share of government liabilities in the U.S. and many other countries. Yet these liabilities are rarely measured, let alone properly adjusted for their risk. This paper shows, by example, how modern asset pricing can be used to value implicit fiscal debts taking into account their risk properties. The example is the U.S. Social Security System's net liability to working-age Americans. Marking this debt to market makes a big difference; its market value is 23 percent larger than the Social Security trustees' valuation method suggests.
Keywords: Social Security; Implicit Liabilities; Asset Pricing; Fiscal Policy
JEL Codes: G12; G13; G23; G38; H2; H55; H6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Market value of U.S. Social Security system's net liability to working-age Americans (APT) (H55) | Market value of U.S. Social Security system's net liability to working-age Americans (SSA) (H55) |
| SSA's valuation method (without wage growth adjustments) (J17) | Understatement of net liability (G33) |
| Uncertain future wage growth (J39) | Valuation of social security benefits and taxes (H55) |
| APT approach (B53) | Accurate reflection of market conditions and risks in social security obligations (H55) |