12. RETIREMENT AND DISABILITY BENEFITS

Liabilities for military retirement benefits and for retirement and disability benefits provided under Civil Service have been recorded, irrespective of whether trust funds exist for the programs, because the liabilities are those of the Government and not of the trust funds and since the covered individuals worked directly for the Government. The recorded amounts are based on the estimated present values of vested benefits, which were derived from the actuarially computed present values of future benefits (as computed by the Government) less the present values of future employee contributions, if any.

The liability for Veterans Administration benefits represents the computed present value of annual benefit payments, which have been estimated by the Government to the year 1999.

The noncash provisions for retirement and disability benefits of $20,560 million for 1974 and $13,360 million for 1973 represent the combined changes in the liabilities for Civil Service, military retirement and veterans' benefits between years.

No attempt has been made to record liabilities for several other Government plans providing future benefits, since the total liabilities for such plans would not be significant in relation to those recorded and certain basic information was not readily available.

13. ACCRUED SOCIAL SECURITY

The Government computes two estimates of future liabilities for Social Security. These estimates are based on a present-value approach, taking into consideration future contributions and benefits which have been established by present laws. Beginning in 1972, benefits are automatically adjusted for changes in the consumer price index. The first estimate, usually referred to as the Official Actuarial Concept, indicates that the excess of benefits to be paid to present and future participants over anticipated receipts for the next seventy-five years on a present-value basis is $1.312 trillion as of June 30, 1974. The second estimate, usually referred to as the Full-Reserve Actuarial Concept, estimates that the excess of benefits to be paid to present participants over contributions by present participants on a present-value basis is $2.460 trillion as of June 30, 1974. This estimate is based on concepts that more closely approximate those used in the private sector.

An accrual for Social Security benefits is reflected in the accompanying financial statements because it appears that such benefits could not be terminated or substantially curtailed without serious social and political implications. Social Security receipts and disbursements are also included in the Unified Budget. Further, in principle, the consolidated financial statements and the accumulated deficit should reflect a liability for the amount of future benefits that will not be covered by future contributions under present law. Under this principle, inclusion of an accrual would seem to be both proper and required. It is recognized that the Social Security Act states that payments should be made only to the extent of the trust funds and that covered individuals who have contributed to the fund have no contractual right to receive benefits; however, this does not negate the need to accrue a liability.

An argument could be made to support the current accrual in full of the estimated present value of the difference between future revenue and benefits, i.e., $2.460 trillion for the Full-Reserve Actuarial Concept. However, it was concluded that a more realistic approach would be to accrue for such amounts over a reasonable future period. In determining such period, recognition was given to the fact that the estimated average period for present participants to contribute revenue under the FullReserve Actuarial Concept would approximate 25 to 30 years; further, the

Government amortizes its prior service costs for Civil Service retirement benefits over a thirty-year period, and any period up to 40 years could be used to amortize prior service costs in the private sector. A period of 30 years was used as a reasonable period in this regard for establishing the amount to be accrued.

The estimated amounts by which the present values of future benefits exceed future receipts, determined on an annual basis for the past five years under the Full-Reserve Actuarial Concept, are as follows (in billions): 1970-$415; 1971-$435; 1972—$1,865; 1973—$2,118; and 1974 $2,460. Using the thirty-year period to amortize the increase for each year results in an accrual of $416 billion as of June 30, 1974, and $341 billion as of June 30, 1973, as reflected in the accompanying balance sheet.

The noncash provisions for Social Security benefits of $75,090 million for 1974 and $63,670 million for 1973 represent the changes in accrued Social Security between years.

14. CONTINGENCIES

Several Government agencies insure businesses and individuals against various risks. The amount of insurance coverage in force, representing the maximum contingent exposure of the Government, is summarized below as of June 30, 1974.

The Government, under several agencies and programs, guarantees loans made to businesses and individuals by non-Government enterprises, such as commercial banks, and by privately owned, Government-sponsored enterprises, such as Federal Land Banks. These guarantees become assets and/or liabilities of the Government only when the Government is required to honor its guarantees. Loan guarantees in force at June 30, 1974, are summarized below.

The annual rental of real property leased throughout the world to the
United States Government is approximately $600 million.

15. RECONCILIATION OF BUDGET DEFICIT

The following tabulation reconciles the reported budget deficits for the years ended June 30, 1974 and 1973, to the excess of expenses over revenues reflected for each year in the accompanying statement of revenues and expenses.

CERTAIN ECONOMIC QUESTIONS

Related to Consolidated Financial

Statements of the United States Government

• The gross Federal debt increased from $250 billion in 1949 to $382 billion in 1970 and to $486 billion in 1974 (see Appendix 1). The amount owned by domestic private investors (as distinguished from foreign investors, trust funds and the Federal Reserve) increased from $190 billion in 1949 to $212 billion in 1970 and decreased to $207 billion in 1974.

What is the significance of these changes will the Federal debt approach a level where it will be difficult to obtain new funds from the public? Is the gross amount approaching a level where the carrying cost will be unduly burdensome? Does this mean that between 1949 and 1974 the amount required to finance the increase of $236 billion in the gross amount of debt had little impact on the capital available for private purposes?

The amount of Federal debt owned by foreign investors increased from $3 billion in 1949 to $14 billion in 1970 and to $57 billion in 1974.

Has the rapid increase in Federal debt held outside the United States created a serious potential for future problems? Is there a possibility of sizable amounts being returned to the United States for sale or redemption, thus creating an immediate drain on the national capital markets?

• The amount of Federal debt held by Government trust funds increased from $38 billion in 1949 to $97 billion in 1970 and $140 billion in 1974.

Is it proper for trust funds to be invested in Federal securities? If so, when such funds are needed, does this create a double requirement for our capital markets? What is the merit of having an organization invest funds held in "trust" in its own securities? Is this a major defect in concept of "trust fund"? Would the implication be any different if states and cities bought securities of their own governmental unit for "trust funds"? Could the Government invest large sums of trust fund money in the private capital markets without disturbing these markets?

• The amount of Federal debt held by the Federal Reserve increased from $19 billion in 1949 to $57 billion in 1970 and to $80 billion in 1974.

What are the implications of continuing to increase the money supply by purchasing more Federal securities?

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• The average maturity of Federal debt has decreased from 5.3 years in 1965 to 3.0 years in 1974.

Does the substantial amount of debt in short-term maturities create a major uncertainty for our capital markets? Does this also create a serious situation for Government when combined with other demands for capital?

• Transfer payments for retirement benefits and salaries for Government employees are a significant portion of the total costs of Government.

Can we adequately manage our financial affairs when retirement benefits are indexed to inflation? From a control standpoint, how can effective financial control be maintained over such costs?

The accumulated deficit on an accrual basis has increased from over $700 billion to over $800 billion from 1973 to 1974.

Is there any practical limit on the amount of the accumulated deficit?

• Retirement benefits, for both Social Security and retirement programs for Government employees, have increased sig. nificantly during the past few years.

Are the present values of future retirement benefits increasing at rates that may substantially restrict the future financial flexibility of the Government? Should the reporting and management policies imposed on the private sector by the Pension Reform Act be extended to cover Government plans? • There are significant Government assets, such as certain land, which could be sold if it were not required for public purposes.

Should the Government adopt a policy that all assets not required for public purposes be sold under a controlled program with such funds designated to pay for present liabilities? Is the Government able to sell assets and use the funds for new programs without the electorate realizing this under the present reporting?

• The additions to property represent a sizable investment each year.

With the significance of capital outlays, should a standby plan be developed whereby certain items would be delayed by Government during high economic activity to provide jobs during recession when the private sector has substantial excess capacity? Can such interface be of prime benefit to both the private and public sectors and reduce the cost of unemployment and other transfer payments during periods of low economic activity?

• The amount of Federal Government transfer payments to individuals has increased from $84 billion in 1973 to about $98 billion in 1974 and is on an increasing trend.

With the size of transfer payments today, and with such payments increasing during periods of low economic activity,