What is the debt-to-GDP ratio if we include the Social Security and Medicare trust funds?

As deficits rise and the Baby Boomers retire, the burdens of government spending on the economy are becoming more obvious. The most common measure of where we are and where may be going is the ratio of debt to gross domestic product. This ratio, more so than the simple dollar value of the debt, indicates the economy's capacity to support government borrowing.

But an important question is how to measure the debt to GDP ratio. All measures include the publicly held government debt, which means Treasury bonds held by everyone from Wall Street investors to ordinary folks saving for retirement. However, it's not clear whether we should includes intragovernmental debt, which is primarily composed of the Social Security and Medicare trust funds.

Many on the left don't like to count the Social Security and Medicare unfunded obligations – which total in the tens of trillions of dollars – as true "debt." That's fine. As some have correctly pointed out, future Social Security and Medicare benefits in excess of what the trust funds can finance are obligations, not liabilities, and can be changed at any time. (It's ironic that many on the left don't wish to change them, but that's another story.) That is, implicit debt isn't the same explicit debt.

But folks on the left are also adamant that the Social Security and Medicare trust funds are true debt – as good as any debt issued to Wall Street, as (say) Dean Baker argues. Ok, that's fine.

But if so, shouldn't we count Social Security and Medicare debt when we calculate debt-to-GDP ratios? I can't see why not. And when we do, it tells a very different picture about the evolution of public finance in the U.S. The chart below is drawn from OMB historical data from 1940 through 2007. It shows both publicly held debt – the kind we usually think about – as well as intragovernmental debt, which includes the Social Security and Medicare trust funds as well as other government trust funds (the highway trust fund, etc.).

As of 2007, publicly held debt equaled 37 percent of GDP. Not a problem, except that CBO projects that the recession and financial crisis coupled with President Obama's spending plans, by 2018 the publicly held debt could more than double, to 82.4 percent of GDP. Most people would consider that a problem.

But then add to that the intragovernmental debt that many people insist must be treated as just as "real" as publicly-held debt. There don't seem to be good projections of future intragovernmental debt, but let's just assume that the ratio to GDP remains the same. (This isn't implausible; while the Medicare trust fund is winding down, the larger Social Security trust fund is projected to peak in the 2020s.)

In that case, by 2018 total government debt will reach 111 percent of GDP. That level would put us somewhere between where Sudan and Jamaica are today, and fifth from highest globally. While there isn't a strict threshold at which debt becomes unsustainable – what matters is the growth rate of nominal debt relative to the growth of nominal GDP – even the IMF and World Bank's debt sustainability framework adjusted for a strong country like the U.S. would frown on debt at that level.

Moreover, the total debt level as of 2018 would be only slightly lower than the historical peak of 121 percent in 1946, when we had just finished fighting a war around the globe. But unlike the debt issued to fight World War Two, this debt won't be incurred in the cause of freedom but in the cause of political convenience – a fight not to defeat foreign enemies, but political opponents who say that long-term spending must be reined in.