When Does Federal Debt Reach Unsustainable Levels? Spring 2026 – Onward

From Penn Wharton

Estimating the outer bound of federal debt capacity requires substantial model sophistication. It cannot be estimated empirically, because the United States has never operated near that bound. It cannot be estimated with reduced-form models, because the outer bound depends on how households and financial markets price risk under fiscal stress, a non-linear behavior that the model must solve for rather than extrapolate.

More importantly, U.S. fiscal policy contains substantial pay-as-you-go transfers (“implicit debt”) that are more than twice as large as explicit (Treasury) debt while producing the same negative economic (“crowding out” of capital) effects (Gokhale and Smetters, 2025). Without this implicit debt, the maximum amount of explicit debt that could be supported would be substantially larger. Measuring implicit debt requires modeling the microfoundations of inter-generational transfers consistent with an overlapping-generations (OLG) lifecycle model. Furthermore, comprehensive analysis must also capture the relative price of risk versus risk-free assets. Capturing a full array of endogenous capital market prices requires an OLG model with aggregate uncertainty.