Paul Ryan and Unfunded Liabilities

In my last post, I was highly critical of Paul Ryan and his abysmal record, particularly when Bush was president.  However, it is not his support of big government that has been receiving the most attention in the last few days since the announcement that he would be running as Romney's vice president.  The most attention has gone to Ryan's proposals to reduce the budget deficits (not the overall debt), in particular by making changes to Medicare and Social Security.

This so happens to coincide with another story that is not being discussed as much.  Economist Laurence Kotlikoff has warned of the coming fiscal calamity.  While I don't agree with all of his solutions, he makes some valid points.  Kotlikoff writes, "Based on the CBO's data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt."

Kotlikoff is referring to the unfunded liabilities of the U.S. government.  This really is an astounding number.  There is no way for me to verify if his estimates are even close.  It would take me several days to study the subject and analyze the data enough just to come up with a ballpark figure.  But I'm not seeing anything that disputes his numbers.

It was a few years ago that I first saw an estimate of unfunded liabilities that exceeded $100 trillion.  When I first saw the number, I didn't think it could be right.  But the more I look at this issue and the more estimates I see, the numbers were probably a good guess and I'm guessing that Kotlikoff's numbers may be just as good now.

The unfunded liabilities are all of the promises that the government has made, yet not funded.  Social Security is a big one.  The biggest one is Medicare.  The ironic thing is that several trillion dollars of those unfunded liabilities is from the Medicare prescription drug program that Paul Ryan supported.

I think it is important to realize the enormity and importance of these numbers, but at the same time, it is not the end of the world.

Most Americans understand there is a problem.  They can sense it.  They understand there is a debt problem.  Still, most don't understand many details and they don't understand the changes that are coming.  I hear younger people joke that Social Security won't be there when they retire.  They may or may not believe it.  I'm not sure that people in their 40's and 50's understand that they are in trouble too.  In fact, almost everyone is going to suffer from this in some way.  Even if someone who is currently 75 keeps receiving the same Social Security checks, what are the chances that the purchasing power won't decline?

The good news about the unfunded liabilities is that they are not like bonds.  They are not a legal obligation to pay someone (even though the government could default on bonds too).  The government can simply change the rules at any time and break previous promises.  In fact, that is exactly what should be done.

The government could pass a law tomorrow that raises the retirement age (the age to collect Social Security and Medicare benefits) to 75 years old.  With the stroke of a pen, they can eliminate tens of trillions of unfunded liabilities right there.  Sure, it will mean misery for many people as they are forced to return to the workforce, but I'm just pointing out that it is not the end of the world.  Anyway, anyone can retire whenever they want if they don't want to depend on the government.

Paul Ryan has been assuring people in the last couple of days that he does not support any changes for those who are already 55 or older.  What?  That is a major portion of the baby boomers.  If there are no changes made to someone who is currently 56 years old, they could end up collecting for 30 plus years in retirement if they live long enough.

In other words, Paul Ryan's plan, while perhaps a better start than most other politicians in DC, does little to close the fiscal gap.

Radical changes are coming, one way or another.  Congress will eventually be forced to cut back.  There are going to be battles on who gets cut the most.  The sooner the problems get addressed, the less devastating the effects will be in the future.  Unfortunately, there is no immediate sign of anything being fixed.

Tomorrow, I will discuss the major divide that is coming to America in the next decade.  I will also make a prediction on which side will prevail.

UPDATE: In the post above, I mistakenly linked to an article from 2010.  Here is a link to the most current article.  Kotlikoff is actually saying that the unfunded liabilities are now $222 trillion.