The state of Illinois has an unfunded pension liability that is estimated at $96 billion. While this seems to be a widespread problem, Illinois has the highest reported liability of any state in the U.S.
According to Wikipedia, the population of Illinois is about 12,875,000. That means that the unfunded liabilities are approximately $7,500 per person. If every person in the state of Illinois (including children and poor people) were to pony up $7,500 right now to the state government, then the problem would be solved, at least for now.
While $7,500 per person seems like a lot of money - and it is - we should take a look at the same figures for the overall United States.
It is hard to get a good estimate of the total unfunded liabilities of the federal government. Laurence Kotlikoff has estimated that the number is well over $200 trillion. This is made up of mostly Medicare and Social Security. While I haven't seen any good analysis to dispute Kotlikoff's numbers, I have seen more conservative estimates at between $75 trillion to $100 trillion.
Let's go with the $100 trillion figure, even though I think it is low. The population of the U.S. is at about 315 million. So let's take 100,000,000,000,000 (yes that is trillion) and divide it by 315,000,000. Every person (including children) in the U.S. would owe over $317,000. Using Kotlikoff's figures, it would be well over half a million.
Do you have $317,000 laying around to donate to the cause? Does your neighbor have $317,000 laying around? Don't forget that you have to pony up for your spouse and children too.
So while the Illinois unfunded pension liability is getting a little bit of attention in the press, it is practically nothing compared to the total unfunded liabilities of the U.S. government.
The Illinois government and the people there have a few options. It can raise taxes. It can drastically cut spending. It can default. It can do a combination of these things. Perhaps it could raise a small sum of money from selling government assets. It could borrow money, but that would be very limited and only a temporary solution. Most investors would demand a high interest rate for taking on the risk of default, especially if the debt keeps getting larger.
The U.S. government has the same options. It can raise taxes. It can default. It can drastically cut spending (even if it seems unrealistic). It can do a combination of these things. It could raise some money from selling assets. But when it comes to borrowing money, it is a different story.
The key difference between the U.S. government and the Illinois state government is that the U.S. government has a central bank (the Federal Reserve). It has a legal monopoly over the money supply. The Fed can create money out of thin air. It can buy government debt through monetization. The only barrier stopping the central bank is hyperinflation.
This is the key difference between the federal government of the United States and the state governments. State governments are forced to balance their budgets, or at least come close. The federal government can keep running up debt for a longer period of time and to a much larger degree, because the Fed can simply create new money out of thin air.
This is why the fiscal/ budget situation with the U.S. government is so out of control. There are virtually no limits. The only limits are an irate populace and hyperinflation. Until we get tens of millions of people who demand drastic cuts in spending or until we get much higher price inflation, then the debt will keep going up. The game will end eventually, but it will be a painful ending when it does.