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 U.S. debt is $211 trillion. It almost makes the official debt of nearly $16 trillion look like pennies and is worse than that of Greece. 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 it includes unfunded liabilities. The Institute places North Carolina at No. 35 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 available at Dec. 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.
The defined-contribution 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.
Fergus Hodgson (@FergHodgson) is Director of Fiscal Policy Studies for the John Locke Foundation.