Government Debt - Implicit Debt

Implicit Debt

Government "implicit" debt is the promise by a government of future payments from the state. Usually this refers to long term promises of social payments such as pensions and health expenditure; not promises of other expenditure such as education or defense (which are largely paid on a "quid pro quo" basis to government employees and contractors).

A problem with these implicit government insurance liabilities is that it is hard to cost them accurately, since the amounts of future payments depend on so many factors. First of all, the social security claims are not "open" bonds or debt papers with a stated time frame, "time to maturity", "nominal value", or "net present value".

In the United States, as in most other countries, there is no money earmarked in the government's coffers for future social insurance payments. This insurance system is called PAYGO (pay-as-you-go). Alternative social insurance strategies might have included a system that involved save and invest.

Furthermore, population projections predict that when the "baby boomers" start to retire, the working population in the United States, and in many other countries, will be a smaller percentage of the population than it is now, for many years to come. This will increase the burden on the country of these promised pension and other payments - larger than the 65 percent of GDP that it is now. The "burden" of the government is what it spends, since it can only pay its bills through taxes, debt, and increasing the money supply (government spending = tax revenues + change in government debt held by public + change in monetary base held by the public). "Government social benefits" paid by the United States government during 2003 totaled $1.3 trillion.

In 2010 the European Commission required EU Member Countries to publish their debt information in standardized methodology, explicitly including debts that were previously hidden in a number of ways to satisfy minimum requirements on local (national) and European (Stability and Growth Pact) level.