The American National Debt---The Unfunded Liability---
Do You Know What Your Representative Is Doing?
I recently wrote a hub titled "The American National Debt--How Big is it Really?. While doing the research for that hub I realized that the information I gathered would require either an extraordinarily long hub or at least two hubs to "tell the story". The is the second in the series dealing with the national debt. I am not sure, yet, if there will be a third.
The US national debt is actually made up of many parts. It is just not the money "borrowed" to fund programs and keep the wheels of government turning. There is also the long term and future commitments made by the government to it's population, business and other nations. In the first hub I dealt with the "Public Debt" which most people are familiar with or have heard about. This public debt , which we all owe, has reached a staggering 14 trillion dollars and it is continuing to climb rapidly. In this hub I will deal with the "Gross Debt" with includes all the "unfunded liabilities" of the US government which is estimated , at this point in time, to be 110 trillion dollars--a number that , in reality, defies comprehension.
What are "unfunded liabilities" and why would they cost so much? The answer is, actually, a simple one. These liabilities are the Social Security costs, namely your government pension and your medicare costs, that the government is obligated to pay, to you and all your fellow citizens upon your retirement. These "obligations" are projected to cost more than 110 trillion dollars over the next 30-50 years. Unfortunately, for us, there is no money to cover these obligations and the consequences will be catastrophic if we don't find a way to solve this calamity.
Your retirement pension is funded by a payroll tax that is deducted from your pay check each week. Your employer matches your contribution and this amount go into a general fund that is used to finance the pensions that our seniors receive each month. Because the payroll tax was sufficiently high and the unemployment rate was sufficiently low surpluses began to accumulate each year. In order to deal with this "windfall" the congress created the Social Security Trust Fund in 1935. The plan was to take the surplus tax dollars accumulating and invest that money to strengthen and protect the Social Security system. I sure we would all agree that it was certainly a good idea......but unfortunately ....we are dealing with politicians and bureaucrats and sometimes the political class should never be left unattended. The thought of such a large amount of money just sitting there proved too great a temptation. The Congress passed laws that allowed them to "borrow" from the trust fund as long as they payed the amount back with interest...sounds good doesn't it? So that is exactly what they did. For the record several administrations of both political parties did this.They all bear guilt in this crime against the American people.
When the politicians borrowed from the trust fund they didn't pay the fund back with cash they had a "better" idea. They decided to pay the fund back with government bonds. After all what could be safer?...right? Very quickly the cash surplus from the fund disappeared and was replace with government bonds or what some have come to call them... I.O.U's. Now depending who you want to believe the current condition of the Trust Fund is at best shocking and at worst grand theft on an unimaginable scale.
According to the governments own sources the Social Security Trust Fund will become insolvent somewhere between 2017-2029. Even they can't agree. .An independent study of the fund in 2009 came to the conclusion that with an "unfunded" shortfall of 15.1 trillion effectively the fund was already insolvent. Who is right? Well actually both positions are telling the truth at least in part. The fund is short trillions of dollars, in value, and with that revelation the fund will not, by itself, be able to meet its' obligations in the near future. If the politicians continue arguing, amongst themselves, about who's to blame and do nothing insolvency by 2017 is probably more likely than anyone would like to admit.
So, how does this affect you and what does this have to do with the "unfunded liabilities"? The generation know as the "baby boomers" are now retiring and will continue to do so over the next 15 years. They will swell the ranks of the retired and quickly overwhelm the pension and healthcare systems. These new retiree's can expect to live well into there 80's. This was never envisioned by anyone when the pension system was set up. The average baby boomer can expect to live into their mid 80's which means they will draw a government pension for 15-20 years and will, increasingly, need the use of the health care services as well putting demands on a Social Security system that was never designed to handle such senarios. Financially it will be a disaster for the US and all the western nations as they will all be in the same situation.
As second "disaster" is also looming which will show itself very soon. All these programs have to be paid from the taxes of the working people of this country. The ratio of workers to retirees is changing quickly and causing another unforeseen consequence. As of 2009 there were 3.2 workers for every retiree. Twenty years ago the ratio was 5 workers for every retiree.These workers pay the taxes that support our retirees pensions and health care. This ratio is dangerously low. It is estimated that this ratio will be reduced to 2.5 workers to 1 retiree by 2016. When that happens the pendulum will swing the other way and we will fall below the level of sustainability where the number of workers cannot support our retired population. Some economist believe the ratio will continue to fall and by 2020 it will be down to 2 workers-1 retiree. There are many who argue that because of the recession and the high unemployment of the last 2 years that the ratio is already below the "break even"point. Only time will tell if they are right.
The fact is that when we do reach that tipping point the taxation rates will not be high enough to overcome a ratio this low. This, unfortunately, means that taxes will have to increase dramatically or benefits and pensions to retirees will have to absorb huge cuts. In all likelihood both of these frightening scenarios will have to be done.. There is no easy choice here. As the years go on the ratio becomes progressively worse and the situation gets critical until around the year 2030 , some say by 2020, the Trust fund will officially be drained of all resources. This is the "Unfunded Liability" that is in our future. The generally accepted amount is that110 trillion dollars will be needed to meet the requirements of our senior citizens over the next 50 years. Whether the total is more or less is essentially irrelevant because we don't have the money to meet this future obligation regardless of the amount.
The numbers tell a simple story. If we do not find a way out of this mess and do it soon--every American BELOW the age of 55 stands to lose their government pension payments along with their medicare coverage. And because of the much higher tax rates ,that are in our future .saving or investing in a private retirement fund will be almost impossible for most. Retirement could be a luxury most of us never experience. One of the signs to watch out for is a move to raise the retirement age to 70 or even 75. This situation is much more serious that most Americans are aware of. It is time for everyone to wake up and get involved in this looming disaster.
To simplify the concept of "unfunded liabilities" think of them as money, the government does not have, needed to pay for 100 million+ Americans who believed they were going to be able to retire someday. Not only is there no source of funds for these "unfunded liabilities" in truth there never was. Succesive governments have spent the future wealth of generations to come. That wealth is gone and those people are not even born yet. And yet it gets worse!
There are some that believe all we have to do is cut spending a little and raise taxes on the evil rich and that will take care of everything! There is a quote that seems totally appropriate for those who share that sentiment.....it goes something like this.... "thinking themselves wise they became as fools"!!!! Let me demonstrate why massive tax increases will not work.
In 2009 the IRS collected 2.1 trillion dollars in taxes. This total represents all the personal income tax from ordinary Americans and also includes all the corporate taxes and business taxes as well. If we accept the total of 110 trillion dollars as our unfunded liabilities then I think we can all agree we have a problem. Let's triple the tax rate for everyone which would leave most of us with little more than money to buy food and nothing else which, of course, would destroy the economy and the tax base. If we do this we would only raise 6 trillion dollars.
Some would have us seize the assets of the wealthy and use this money for the common good. In 2009 the IRS estimated the total assets of the richest among us at just over 11 trillion dollars. A lot of money for sure but compared to what we require.....little more that a drop in the bucket
We could also sell all the national assets---everything in the country of any value. The estimate for all the assets of the United States is 73 trillion dollars however we owe 54 trillion against those assets, that would have to be paid, leaving us with a profit of 19 trillion. So let's take a look at where we are. We have tripled everyone's taxes and, in doing so,destroyed the economy. We have seized all the assets of the rich and we have sold every thing of value the citizens of the United States ever owned and we have raised........36 trillion dollars....unfortunately we are a little short... we still need another 74 trillion dollars!!!
So what is the answer to this looming disaster to the United States? The truth is........no one knows!. There have been many suggestions but all fall short and do not provide the answers we need. There is agreement on one course---the government must stop spending and borrowing. The tax system must be simplified and made more efficient. All spending, including military, must be reviewed. Budget cuts must be made but the politicians cannot be allowed to control the agenda. We the people must become involved or we stand to lose it all. The politicians in Washington and in all the state capitols, regardless of which political party they belong to must be held accountable for their actions. We can no longer afford to leave these people, who have helped bring this nation to the brink of disaster, unsupervised. If the American people do not get involved in this then we will find ourselves in a place no free nation should ever go. We will lose our freedom to our Creditors and our future to "Their" vision of this country.........The world will lose its' "light" and we will lose ourselves.
Is it too late? I say no it is not!. The solution can and must be found. The American people must get involved. They can no longer stand of the sidelines while, at best our's and at worse our creditors, politicians decide the fate of this country.
"Unfunded Liabilities" Where does your Representative stand? People before Politics......Country before Party!