In part 3 of this series, we showed that our government owes somewhere around $20 trillion in debt from various sources. This number is growing rapidly as they continue to spend more than they get in revenue — the deficit.
$20 trillion sounds like a lot of money, and it is, but there is an additional problem – unfunded liabilities. Unfunded liabilities are what the government has promised to pay for in the future, but does not have money set aside to make those payments. The largest parts of the unfunded liabilities are Social Security, Medicare, and Medicaid, which is split between the Federal and State governments. Current credible estimates for the money needed to cover these liabilities include 86.8 trillion dollars* and 122 trillion dollars**. A precise number can’t be determined because the actual cost of the programs depend on future projections.
* From a recent Wall Street Journal article, “Cox and Archer: Why $16 Trillion Only Hints at the True U.S. Debt”. Their $16 trillion figure does not include state, local, and structural debt.
** From The US Debt Clock
Liabilities are expressed in net present value. Net present value is a calculation of how much money would be needed in today’s dollars to cover payments over time in the future, so it’s a lot like having a debt and calculating the monthly payment. The cost of social programs such as Social Security and Medicare are not fixed, since they vary according to political choices, and even random events, but they can be estimated using past data as a model. The future projections used to get the $86.8 trillion and $122 trillion estimates are for 75 years, meaning what we would need in cash today to cover the expenses in these programs for the next 75 years. Going between some of the estimates, let’s use $100 trillion as the amount needed – five times the current total debt level of $20 trillion.
Let’s go back to our fictitious example of Joe, who makes $25,000 a year but spends $24,000 a year and is already $200,000 in debt. Now we add a new and more serious problem – Joe’s parents are retiring, and don’t have enough in savings, so Joe has promised to pay a portion of their expenses for the rest of their lives. Unfortunately, Joe is already spending more than he makes, and has nothing in his own savings account to cover his parents’ expenses. Joe’s accountant explains that to cover these expenses for as long as his parents are expected to live, Joe would need a million dollars in the bank today. Joe’s debt is $200,000, but when you add his unfunded liabilities Joe’s on the hook for more like $1,200,000 – unless he chooses not to keep his promise to his parents.
There’s the escape clause – in theory, the government could choose to lessen or even stop paying Social Security, Medicare, and Medicaid, just as Joe could choose not to pay the promised share of his parents’ expenses. In practice, this is nearly impossible. People have come to depend on these programs to survive. By itself, Social Security doesn’t provide a standard of living too much better than bare subsistence. Lowering its benefit value in any substantial way would almost certainly push those without hefty retirement savings into abject poverty or worse, homelessness and death. Does anyone think that today’s young generation is going to assume the burden of taking care of their elders in large numbers? If not, what happens to them? Do we let people die in the street?
Lowering the cost of Medicare or Medicaid is also an extremely difficult proposition. Under the current health care system, we have little to no control over medical costs, which are increasing more rapidly than the official rate of inflation. We have some uncomfortable and difficult choices to make, but so far, people have shown little appetite for such changes. Unless health care in the United States is overhauled completely in a way that controls costs, the unfunded liabilities that relate to it will remain. The longer they remain, the more money we spend that we don’t have, and the higher the debt will go.
Imagine we do nothing and the unfunded liabilities actually do have a net present value of $100 trillion. This would mean that our current debt is really $120 trillion instead of $20 trillion. If it isn’t possible to pay $20 trillion, how can we pay $120 trillion?