The True Cost of Social Security

Implicit government obligations represent the lion’s share of government liabilities in the United States and many other countries. Yet these liabilities are rarely measured, let alone properly adjusted for their risk. This paper shows, by example, howmodern asset pricing can be used to value implicit fiscal debts taking into account their risk properties. The example is the US Social Security system’s net liability to working-age Americans. Marking this debt to market makes a big difference. Based on our preferred estimate, itsmarket value is 86% higher than the Social Security trustees’ valuation method suggests. Our alternative arbitrage pricing theory specifications range from 74%to 115%higher than that of the Social Security Administration.