John Locke Update / Research Newsletter (Archive)

Unfunded Liabilities Won’t Go Away

posted on in Fiscal Insight

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While unfunded liabilities continue to garner plenty of attention in the press, I fear a lack of understanding means this attention is failing to translate into legislative action. Despite a relatively simple reform available to stem the tide at the state level — defined contribution pensions — unfunded liabilities keep on growing.

I remember when someone first introduced me to the concept, I had a difficult time getting my head around it. Put most simply, unfunded liabilities are debts — money owed to creditors — but they have been labeled in such a way that they are not recorded on an ongoing basis. This labeling may also mean they are not legally enforceable.

Social Security is a clear example. When you pay these taxes (or "contributions," as they’re euphemistically known), one assumes that the federal government owes you this money back when you retire. Even if not legally enforceable, the political pressure is sufficient that federal officials have paid the debts for almost 80 years now, and the generosity of these benefits has only expanded over the decades.

Unfortunately, federal officials have labeled these taxes as revenues and spent them, even though these collections have generated obligations at the same time. If we were to call your Social Security taxes "loans" to the federal government, along with other entitlements such as Medicare, we would have a completely different picture of the debt situation.

According to Laurence Kotlikoff, an economist I hold in high regard, if one accounts for unfunded liabilities, the United States debt is $211 trillion. It almost makes the official debt of nearly $16 trillion look like pennies and is worse than that of Greece.

Here is a presentation he gave in 2004. Very little has changed, except the severity of the situation, and I encourage people to read his book, The Coming Generational Storm.

On the state level, the Institute for Truth in Accounting has just released a ranking of debt per taxpayer, and they have included unfunded liabilities. They place North Carolina at 35th in the nation, with the 16th highest debt per taxpayer at $14,800.

A little context suggests why these liabilities are in urgent need of address if a default is to be avoided. The $14,800 comes from numbers at December 31, 2010. Just one year prior, the number was $11,200 per taxpayer.  That’s an increase of 32 percent.

The state employee system of retirement medical benefits and pensions is most in need of address, and would best be converted to defined contributions rather than defined benefits. That would mean money set aside now at an assured level as opposed to promises for future payouts without sufficient funding to support them. The conversion would not do away with the accrued debt, but it would stop the situation from worsening immediately.

I shall examine the defined-contributions alternative in future newsletters and Spotlights, but the approach is not so easily applied to Social Security. That program is such a mess, I encourage a simple opt-out option, as promoted by Ron Paul in his campaign for the Republican presidential nomination.

Image of the week!

They may be everywhere, but some of them are really worth their salt. I’ve decided to include an image meme in each newsletter, to provoke thought and give you a smile. This one is from Robert Higgs, regarding the purported social contract that many people use to justify so much governmental activity. It narrowly beat out one I came across a few weeks back, on why real men read books.


  • Given my background as an immigrant from New Zealand, I continue to accept interviews about why immigration is a win-win and the prevailing immigration laws are so destructive. If that interests you, please consider this blog post, which includes an interview with WGSO in Louisiana, "Let us come: Immigration is a win-win."
  • If you are curious to learn more about immigration law, particularly if you are of the "enforce the laws" persuasion, you’d do well to join the Eastern North Carolina Tea Party on Thursday evening. Ron Woodard, director of NC LISTEN, will be a guest speaker — 6pm at the Warehouse Restaurant in Winterville, North Carolina.
  • As some of you may already know, I am highly active on Twitter and glad to engage with more people through that medium. If you would like to follow me, my username is @FergHodgson (si prefiere espanol @Fergusito).

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Fergus Hodgson (@FergHodgson) is Director of Fiscal Policy Studies at the John Locke Foundation, a Policy Advisor with The Future of Freedom Foundation, and a member of the American Legislative Exchange Council’s Tax and Fiscal Policy Task Force. He… ...

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