Unfunded Liabilities

We are told that unfunded liabilities are about $60 trillion. In my view, this is an extremely misleading figure. Michael Cannon from Cato noted that US Federal government unfunded liabilities are more like $119 trillion. I think Cannon’s estimate is also too conservative.
If you take a valuation approach to the debt creation similar to how valuation of a stock price is carried out, you come up with much larger numbers. A stock price is a function of the stream of expected earnings. How far out should this stream of expected earnings included in the expectations? Is it just 1 year, 2 years, 10 years, or what? The length depends on the type of business and the degree of uncertainty. When the discount rate is sufficiently large to make the value of the period so small that that period doesn’t matter. With debt the discount rate doesn’t change as rapidly because uncertainty does not rise as time increases.
More importantly, I maintain that all debt has an implicit government guarantee. Thus, any increase in debt implies an increase in unfunded liabilities. Consider for instance, the Pension Benefit Guarantee Corporation, a government agency. Here is what its mission statement says:
• We work with companies to keep their pension plans. Last year PBGC staff negotiated with dozens of companies, both in bankruptcy and otherwise, to preserve their plans. Partly as a result 250,000 people will keep their pension plans that otherwise might not.
• When plans do fail, we step in and make sure benefits keep getting paid. We work to ensure that retirees get the full benefits provided by law—on time. Over the years we’ve become responsible for almost 1.5 million people in 4,200 failed plans. Every month, on average, we pay $467 million for pensions for 801,000 retirees. PBGC is also responsible for future payments to almost 700,000 who have not yet retired. During FY 2010, we assumed responsibility for 109,000 additional workers and retirees in 172 failed plans.
• We implement pension laws, and work with the President and Congress to improve them. In FY 2010 we worked with both the private sector and other government agencies to implement the funding provisions provided by the Pension Protection Act of 2006, and, working with other agencies, helped Congress revise it. We will continue to provide policymakers with the information they need to decide if and when future changes are necessary.
Another example includes all bank deposits and loans. If sufficient to upend the balance sheet of a financial institution, all debt created by loans from financial institutions is implicitly guaranteed by the government. Consider these numbers listing the nation’s unfunded liabilities:
1) Federal government: $120 trillion
2) Pensions Benefit Guarantee Corporation $1.5 trillion
3) State and Local Governments $4 trillion
4) Private Sector guarantees by government X percent of Private Sector Debt ?
5) Private Sector Debt = 7.6 x public sector debt = $90 trillion
If “X” is .90, then unfunded liabilities exceed $200 trillion, using current estimates of federal government and state and local government unfunded liabilities. If that estimate of unfunded liabilities is undervalued, then we could argue that total unfunded liabilities exceed $300 trillion.
At what point does debt become too high? If unfunded liabilities are $120 trillion, with 320 million people in the U.S., then each person, each man, woman and child has a liability of $37,500. With unfunded liabilities of $300 trillion, total per person liability is about $1oo,ooo per person.