Terms

Unfunded Liability

Simply, the Unfunded liability is the amount to be paid over a period minus the anticipated revenues (and existing assets) available to make those payments.

When we consider private pension programs, at issue is the question of, if the programs were to shut down today, whether or not there be sufficient reserves already on hand to pay the pension obligations built up as of today.

The problem is more complex when measuring the unfunded liability of Social Security, as it has never operated (or been designed to operate) the way private programs are compelled to operate by law. Social Security has always relied on future revenue to meet current obligations. This "pay as you go" (sometimes shortened to "Pay-Go") system requires that we be able to project the future income streams as well as benefits.

The American Society of Actuaries -- a professional and totally a-partisan group -- has determined that the most appropriate way to measure theses unfunded obligations is by looking at the presumed benefits and revenues over a 75 year period. /1/ On this basis, the trustees report the Unfunded Liability at 1.89% - or $3.7 trillion over the next 75 years. (That's about 13% of the benefits expected to be paid).

It must be noted that the figure is based on a number of assumptions about both the economy and birth and mortality rates, so other figures, from objective sources exist. In fact, the Social Security Administrations own actuaries offer three possible sets of figures based on optimistic (low cost), reasonable (intermediate) and pessimistic (high cost) assumptions. The Social Security figures we use here (and are the ones most widely reported) are the intermediate ones. The Congressional Budget Office also offers its own figures that put the unfunded liability at about one half the Social Security actuaries'.

It must be noted that the differences aren't a matter of "cooking the books" -- they are based on best estimates of future conditions and reflect uncertainty about what those conditions will actually be.

Footnotes

1. Source: " American Academy of Actuaries, "An Actuarial Perspective on the 2004 Social Security Trustees Report", http://www.actuary.org/pdf/socialsecurity/trustees_apr04.pdf, pg. 3, viewed 12/26/04, 11:18 AM EST.