Unfunded Obligations
All right, today, I’m going to talk about unfunded obligations.
In a previous post, I mentioned entitlements, and entitlements are… Basically, I’m going to define them as is unfunded obligations, which is basically a promise that the government has made that they can’t necessarily afford to keep, or they have a budget for it, but it hasn’t been completely funded.
The two biggest unfunded obligations that that most people are aware of are Medicare and Social Security. That’s from a federal level. There are state-level pension funds.
Massive Debt & Growing
We live in California. I used to live in Hawaii. Hawaii had a reported $12 billion deficit from their pension fund obligation. The actual number I think is more closer to 40 billion. It’s what they’re allowed to report. It looks a little bit smaller. Anyhow, California, I think we’re number two in the country at just over 80 reported, 80 billion in unfunded pension obligations. Those are managed at the state level unless, of course, the government needs… So far, we haven’t had any bailouts, but that’s as of 2020. Again, those are managed at the state level, but that’s a example of an unfunded obligation.
We're Living Longer
Let’s talk about Social Security and Medicare… I’m sorry. Social Security was created back in the Roosevelt era as part of the New Deal because after the Great Depression, there was a unprecedented amount of senior citizens that were homeless. Something obviously had to be done. Government steps in and says, “We’re going to create social programs such as Social Security, welfare.” It was really insurance against outliving your income, your job, your pension, whatever.
The average life expectancy back then wasn’t very high. It was somewhere in the mid 60s, so the average time that someone drew off of Social Security back then I think was like two years or something like that. I don’t have the data in front of me, but I’m talking about generalities here.
Fast forward now. Obviously, life expectancy, tack on about 20 years to that. Most people retire around the age of 65, so there’s more people taking money out of Social Security than there were back then.
Add in the baby boomers, we had a massive explosion in population in the working force, so there was definitely more people paying into Social Security back then.
Now I think the number is two to one, two workers paying in for every one person drawing on Social Security, taking it out.
I don’t know if you remember this, but we used to get the statements in the mail that would show you what to expect when you start drawing on Social Security. Well, they stopped sending those probably because they’re trying to cut costs. Go figure.
The last one I got… This is public information. It said on there that Social Security would not be able to meet its obligations by, I think, somewhere around the year 2030-something. Now they’re saying it’s in the 2020s that you’re likely to be receiving only about 80% of your benefit or somewhere in there. Social Security is going broke.
The G-Fund
Another fund that the government’s been kind of pilfering is called the G Fund, and that’s if you served in the military or you’ve served in the federal government and you have a TSP plan, you have all these different funds that you can choose from. Well, the G Fund is one of them. It’s usually the safest one. It’s kind of like a bond. It’ll pay you like 2% or something like that. Well, they’ve gone in there routinely and borrowed money against that as well, so it’s not just Social Security that they’re kind of dipping into.
Despite Social Security not being funded properly, the government also dips into these funds in order to fund other programs and kind of rob from Peter to pay Paul, so to speak.
Add on to the improper funding of these obligations or entitlements, the fact that that’s happening as well, and all of a sudden, we’re starting to kind of uncover a bit of a problem.
It should be noted too, and I think I mentioned this in a previous post, that the national debt calculation, the $27 trillion to date, I think that’s what it is right now, (we’ll put a ticker that shows it below this) that does not include unfunded obligations.
That doesn’t include Medicare.
That doesn’t include Social Security.
U.S. National Debt
The experts, some of the people that are involved with social program reforms or entitlement reforms estimate that that’ll tack on another $200 trillion to our national debt, and if you’ve done any homework on what our threshold is for debt, what happens when we go above a certain number before we’re broke and we can’t afford to service the debt, that number is like 50-something trillion dollars.
The math doesn’t add up, and we’ve over promised. Now we’re in a situation where we have lower GDP that has led us into a decline in GDP, led us into the recession.
A lot of folks are feeling a lot of a pain, especially if they don’t have any savings, which is a lot of Americans, so we’ve come out with these bailout packages, which has added onto the debt, not decreased it.
The social programs that we have were, of course, set with I think a good… It was good approach.
There was the spirit of the bill or the legislation that put it through was good. It was to help homeless seniors, people that couldn’t afford medical care. The nature of that idea was good.
It’s gone for so long that now we’re kind of in over our heads, and either they have to reform it or they’re going to have to raise money one way or another.
There’s several different theories out there, but I’m not going to go too deep in the weeds on what they are and why they are, but the reality of the matter is, is that we’ve over promised for what we have available.
Our population is not increasing like it was in the baby boomer time. I mean, people are having one or two children, sometimes three. They’re not having five, six, seven, like my parents and my grandparents. Very different situation.
I don’t think… None of us, none of the economists, none of the people that understand a lot of this believe that the government’s not going to make good on Social Security. It’s just what’s the value of that dollar that’s going to be given to you at the time when, say, they have to print money to find their way out of this thing. It’s quite a conundrum.
The takeaway here, really, is you’ve got to plan around this. If you have the means to plan around Social Security possibly not being there, Medicare possibly not be in there, or not at least in the way that we think it’s going to be there…
Oh, I didn’t even bring up Medicaid. That’s another type of welfare program, but Medicaid, for instance, if you don’t have long-term care insurance and you have to spend down all your assets, they way underestimated the likelihood of someone needing long-term care or needed some type of in home or facility-run skilled care when we’re on our way out, so that’s another huge, huge issue that the government’s really driven a message to the public sector to help them kind of clean up or shoulder that burden.
Takeaway, of course, is do your planning, understand what the probabilities are, ensure against the possibilities.
That’s kind of my mantra, but it’s a very real issue. Regardless of which way you vote or who’s in office, again, it comes back down to an accounting problem.
If you’re exposed in any way, shape, or form to tax rate increase risk, I would implore you to do some planning and to really understand how you’re exposed introducing before and after comparisons, even if taxes go up 1%, what is it going to do to your retirement accounts if you haven’t paid tax on them yet, what is it going to do to your income if you’re living on a specific budget and you’re earning a specific amount.
These are all things that you need to take into consideration if you’re going to be able to weather this storm… I don’t want to say comfortably, but comfortably.
And this is where we can help. It all starts by scheduling a short complimentary consultation call to learn if we’re a good fit and how we might be able to help you reach your goals.
