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June 16, 2010

What an Unfunded Liability Looks Like



“You said the unfunded cost of Medicare is 37 trillion dollars.  What’s that?  Is that the cost of Medicare over the next 100 years?”  -Senator Sherrod Brown (who apparently does not know how much Medicare costs or what an unfunded liability is)
I saw a video a few months ago about someone in the Tea Party Movement asking Senator Sherrod Brown about how the government plans to deal with the unfunded liabilities of Medicare and Social Security (you can see the entire video here).  Senator Brown responded by berating the questioner and doubting his arguments.  He never added any meaningful information or seemed to care what the true cost of these entitlement programs will be.
This episode of political ignorance prompted me to write an article about what an unfunded liability is.  A liability is a cost that is real and is expected to be paid at a later date.  Examples of liabilities are bills you have been invoiced for but not yet paid.  Other, longer term liabilities are mortgages, car loans, and credit card debt.  These liabilities are eliminated through weekly, monthly, or quarterly payments (monthly being the most popular).
If you are paying your mortgage on time with a steady stream of income, then the liability is funded.  If your mortgage payment is going to balloon to higher than your expected income in the future, then the portion of the mortgage payment you cannot pay is considered an unfunded liability.  Therefore (are you following me Senator Brown), an unfunded liability is the portion of expected future costs that cannot be covered by the future projected revenue.
So, how do we get to tens of trillions of dollars in unfunded liabilities over the next 60 to 80 years?
As the Baby Boomer generation gets older, the number of dependent citizens will skyrocket by tens of millions of people.  On top of that, healthcare costs (which accounts for the largest expense area amongst seniors) is expected to grow at almost ten percent per year with no end in sight.  Additionally, since people have been having fewer children for decades, there will be a smaller workforce around to fund these costs.
Hence, the gap created between the two is the unfunded liabilities.  This gap is also evident when we analyze the political ambitions of those who pass these entitlements.  Politicians are focused on the benefits of what the welfare state can provide for their voters, but do not seem to care about the costs.  Evidence of this can be found in the recent ObamaCare bill, which has zero fixed earmarks, but plenty of sentences explaining that the federal government will provide unlimited funding to operate program A, B, or C.
So, Senator Sherrod Brown, do you now understand what an unfunded liability is?

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