The true cost of Social Security

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. Based on our preferred estimate, its market value is 86 percent higher than the Social Security trustees' valuation method suggests. Our alternative APT specifications range from 74 to 115 percent higher than that of the Social Security Administration.