The U.S. government reports its debt at more than 17 trillion dollars. To put this sum in perspective, it’s well over 50 thousand bucks for every man, woman, and child in America. Of course children and retirees don’t work, so the debt burden on each working adult is much higher.
Unfortunately, this is only a small part of the total debt. The government excludes a much larger sum from its books, commonly called the unfunded liabilities—future obligations it must pay, but which it has no way to pay. These obligations stem from numerous programs.
For example, bank deposits are guaranteed through FDIC and mortgages via Fannie Mae. These guarantees have risk and cost, in other words, financial liability. Together they add up to trillions of dollars. The largest of the unfunded liabilities are from Medicare and Social Security, which dwarf the liabilities from all others combined. I’ll focus on Medicare to keep it simple, but most of what I say also applies to Social Security.
Medicare is like insurance in many ways. Here’s how insurance is supposed to work. The insurer charges a monthly premium and in exchange, promises to pay claims. So long as the insurer follows two simple rules, it will be able to pay. One is the premium must be high enough. The other is the premium must be invested properly. The investment is the key. It’s the asset that funds the liability.
Medicare does charge a big premium, in the form of a tax on your paycheck. It may or may not be high enough, but the government spends it entirely on current benefits and its general budget. It does not invest it. This is why we say that Medicare liabilities are unfunded.
Medicare is a complex and massive government program. To see its fatal flaw more clearly, let’s look at a simple example first. Mendacious Corporation (not a real company) sells a policy that’s guaranteed to pay $1,000 next year. The company charges only $100 premium, so obviously it won’t be able to pay.
So an investigative reporter interviews the CEO and asks him how Mendacious can possibly honor its promise to pay next year. He looks into the camera and says, “Don’t worry, we will sell more policies before then. The premiums will give us plenty of money to pay out.”
Of course this is fraud, a classic Ponzi scheme. Money from new participants is used to pay the old. Every Ponzi scheme is always one step ahead of insolvency. Each new dollar keeps it alive for a day, but at the same time adds to the burden. Mendacious will implode sooner or later.
With Medicare, the government is Mendacious. It takes in new money from current workers and pays it out to beneficiaries. It promises workers that it will pay them in the future, but it fails to plan, or account, for that. It just assumes that there will be perpetual growth in the number of new workers entering the scheme. Meanwhile liabilities are growing out of control.
Medicare and Social Security should be put into receivership immediately, to minimize further losses for retirees and workers. The problem only gets worse and bigger every day we kick the can down the road.
So how much has the government racked up in unfunded liabilities? No one knows for sure, but I’ve seen credible estimates starting at $127T and going up from there. Assuming the bottom end of the range, the burden on each and every working person is about $1M.
The term unfunded liabilities is a dry and antiseptic term that makes people’s eyes glaze over. It serves to conceal a crime so big, that it makes Bernie Madoff look like a fourth grader stealing his classmates’ lunch money.
The reality is not very complicated. Our government has been making promises that it cannot honor. When it defaults, retirees and workers will realize that they’ve been robbed of their savings and pensions. Most will never fully recover.
The best way to help everyone understand the truth is to use plain and accurate language. Instead of unfunded liabilities, I suggest fraudulent promises.
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