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Author Topic: How do "Unfunded Liabilities" Work?  (Read 589 times)
theonewhowaskazu
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November 02, 2013, 09:43:12 PM
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I'm seeing about 125 Trillion dollars worth of "unfunded liabilities" of the Federal Government. I understand that that's basically composed of Medicare & Social Security liability.

But what exactly does this mean? Is that some kind of projection as to the total amount the Federal Government is going to have to pay for everybody currently alive, in which case it seems sort of unfair to act as if it is some kind of shortfall in the present, or is it the kind of liability that will suddenly drop onto the balance sheet? If so, what will cause that to happen.

Here's what I'm asking: Say I'm likely to live to 100 years of age, and I'm currently 30, and I have to pay for a Comcast bill of $150 each month. Thus, throughout those 70 years I'll have to pay a total of $126,000 to Comcast. And I don't have that much money, so you could say that I have $126,000 in "unfunded liabilities." But that's not really fair; thats why I go to work each day, so I can get money to pay for that expense. And if I don't, I might need to change my plans and not get such a good package from Comcast. But I can afford my monthly payments, so for all practical purposes that's "funded."

But then, say I also had written a ton of uncovered calls on the VIX, when it was at 12. Now its at 13.28 and I don't have the money to cover my calls, but since nobody has exercised their options I'm not yet in real 'debt'. That's also "unfunded liabilities", but of a much more real variety, a type that actually would be fair to say "well, its practically debt, they're just putting it off for a while."

Of the 125 Trillion dollars of unfunded liabilities, how much falls into each category?

EDIT: Shit, meant to put this in economics ~.~

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rocks
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November 02, 2013, 10:50:11 PM
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My understanding of the unfunded liability portion is this.

Let's take your Comcast example. Suppose the way you purchased cable from Comcast was to contract 30 years in advance, for example every month you promised Comcast that you will purchase $150 of cable from them for one month 30 years from now, and you repeated doing this each month. Now every month that goes by you have a "future liability" of $150, so after one year you have a future liability of $1,800 and after ten years you have a "future liability" of $18,000.

Now for the "unfunded" part, lets say that your income minus other expenses left you with $75 each month. Since you know that you will have to pay Comcast $150 in the future you save that $75 to pay that $150 bill, which is not enough. You now have a "funded liability" of $75 and an "unfunded liability" of $75. This unfunded liability keeps growing and after 30 years you have an unfunded liability of $27,000, but you also have $27,000 saved for the total $54,000 future liability.

This may seem manageable, but it gets very ugly, here's how.

Now 30 years goes by, and Comcast says OK pay me $150 a month now. You have $27,000 saved and $75 coming in each month. This is not enough to pay Comcast, so you do two things: 1) You take the $75 coming in each month and no longer save it but spent it by giving it Comcast and 2) you take $75 from your savings each month and give it to Comcast. Comcast is happy, you promised $150 and they are receiving $150. However, 1) your savings is rapidly dwindling and 2) each month you are still promising $150 a month 30 years from now. Each month your "unfunded liability" keeps growing because you are spending your savings account and no longer saving at all for Comcast's future payments.

After another 30 years goes by you have fully spent your saving account, but Comcast wants $150 each month but you only have $75 coming in. So you start to borrow $75 each month to pay Comcast.  Now not only are you no longer saving at all, but you are going into debt. Your unfunded liability here would be $54,000. But everyone is happy, you are getting cable while not saving and Comcast is getting $150 a month. However each month your "unfunded liability" keeps growing, both in terms of the promises to Comcast and promises to the bank.

Many many more years go by. You now owe $1M to the bank, owe $150 to Comcast each month, but only take in $75 each month. This is what the massive unfunded liability number of $125T really represents.

Since you are the government a couple things happen: 1) You stop paying Comcast $150 each month and only give them 50% of what is promised (the $75 you take in). This damages Comcast because they expected $150 and need that. 2) You tell the banks that you will not pay them $1M and default (either through inflation or a refusal to pay, both are the same).

Comcast in this example are Social Security payments to Gen-X, Y and Millennials, Obamacare, Medicare, etc.

Banks in this example are individuals with savings in savings accounts at banks.

Got it?
theonewhowaskazu
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November 02, 2013, 11:28:17 PM
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My understanding of the unfunded liability portion is this.

Let's take your Comcast example. Suppose the way you purchased cable from Comcast was to contract 30 years in advance, for example every month you promised Comcast that you will purchase $150 of cable from them for one month 30 years from now, and you repeated doing this each month. Now every month that goes by you have a "future liability" of $150, so after one year you have a future liability of $1,800 and after ten years you have a "future liability" of $18,000.

Now for the "unfunded" part, lets say that your income minus other expenses left you with $75 each month. Since you know that you will have to pay Comcast $150 in the future you save that $75 to pay that $150 bill, which is not enough. You now have a "funded liability" of $75 and an "unfunded liability" of $75. This unfunded liability keeps growing and after 30 years you have an unfunded liability of $27,000, but you also have $27,000 saved for the total $54,000 future liability.

This may seem manageable, but it gets very ugly, here's how.

Now 30 years goes by, and Comcast says OK pay me $150 a month now. You have $27,000 saved and $75 coming in each month. This is not enough to pay Comcast, so you do two things: 1) You take the $75 coming in each month and no longer save it but spent it by giving it Comcast and 2) you take $75 from your savings each month and give it to Comcast. Comcast is happy, you promised $150 and they are receiving $150. However, 1) your savings is rapidly dwindling and 2) each month you are still promising $150 a month 30 years from now. Each month your "unfunded liability" keeps growing because you are spending your savings account and no longer saving at all for Comcast's future payments.

After another 30 years goes by you have fully spent your saving account, but Comcast wants $150 each month but you only have $75 coming in. So you start to borrow $75 each month to pay Comcast.  Now not only are you no longer saving at all, but you are going into debt. Your unfunded liability here would be $54,000. But everyone is happy, you are getting cable while not saving and Comcast is getting $150 a month. However each month your "unfunded liability" keeps growing, both in terms of the promises to Comcast and promises to the bank.

Many many more years go by. You now owe $1M to the bank, owe $150 to Comcast each month, but only take in $75 each month. This is what the massive unfunded liability number of $125T really represents.

Since you are the government a couple things happen: 1) You stop paying Comcast $150 each month and only give them 50% of what is promised (the $75 you take in). This damages Comcast because they expected $150 and need that. 2) You tell the banks that you will not pay them $1M and default (either through inflation or a refusal to pay, both are the same).

Comcast in this example are Social Security payments to Gen-X, Y and Millennials, Obamacare, Medicare, etc.

Banks in this example are individuals with savings in savings accounts at banks.

Got it?

Ok, so, the good news is that all the unfunded liabilities won't drop onto the balance sheet all at once, the bad news is that its still all eventually debt, it just might be a  while and becomes debt at a fairly predictable rate.

Now the question is, what stage are we in. Are we in the (A) still saving $75/mo stage (which apparently is going into not-quite-reducing our national debt) (B) in the spend $75 of our savings stage or (C) in the borrow $75 stage? Also, how much time is there between phases.

Also one other thing I don't get: How are the banks the individuals with savings in savings accounts at banks? Is the theory that they'll lose their money to inflation as the USG borrows more from the Fed to pay the unfunded liabilities?

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November 02, 2013, 11:34:39 PM
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I think its on the *balance sheet* alright. The only saving grace is that its not due right now (or perhaps ever...)

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November 03, 2013, 02:26:42 AM
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Ok, so, the good news is that all the unfunded liabilities won't drop onto the balance sheet all at once, the bad news is that its still all eventually debt, it just might be a  while and becomes debt at a fairly predictable rate.

Now the question is, what stage are we in. Are we in the (A) still saving $75/mo stage (which apparently is going into not-quite-reducing our national debt) (B) in the spend $75 of our savings stage or (C) in the borrow $75 stage? Also, how much time is there between phases.

For SS we recently went from stage A and entered stage B. So SS is a longer term issue, but the problem there is the monthly amount owned is rapidly rising and the C date keeps being pulled in.

All other government programs are well into the C stage.... The reason people point out the $125T unfunded liability is that it is absurd to think this is payable, and obvious that the government will just renege on promises to people (and cause a lot of pain in the process). Oh, and the $125T is a present value inflation adjust value, it means you need to find $125T in today's dollar value. Inflation does not help you because most government programs inflation adjust.

Also one other thing I don't get: How are the banks the individuals with savings in savings accounts at banks? Is the theory that they'll lose their money to inflation as the USG borrows more from the Fed to pay the unfunded liabilities?

Some government bonds are owned by individuals and savings plans, but most are owned by banks. The reason I said the individuals own them however is the bank is just an intermediary to savings accounts. When you deposit money in a bank, the bank spends that money and buys a government bond. Yes the bank owns the bond, but if the government defaults on the bond then the bank will default on your savings account.

Defaulting this way is very obvious and makes voters unhappy, so they take the inflation route over and over again. (Just read about Rome in the 200s AD.) History has shown people whine about high inflation, but rarely revolt.
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November 03, 2013, 06:31:32 AM
 #6

Your mortgage is an unfunded liability for future years.

You promised to pay $150,000. You did not have $150,000 but you promised that over the next 30 years you would pay it.


I work in the government contracting world. Some projects I work on the government will say, this is a 3 year contract which will do X the first year, Y the second year and Z the third year.

They may tell Boeing that they want a new airplane, they tell them they want it in 10 years and that they will buy 50 planes and pay $2 billion a year toward development with a support contract on each plane for 5 years after that and they will pay $500 million per plane once they are delivered. All future money, all locked in no matter who is in office (Republican or Democrat).

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