Unfunded Liabilities and a Long-Term Fix to Social Security and Medicare

Overview

In our ongoing efforts to keep you informed about important financial concepts and their implications, today we're going to delve into the topic of U.S. unfunded liabilities and a potential fix. This term might sound complex, but it's crucial for understanding the nation's financial health and, indirectly, how it might affect our personal finances.

In simple terms, unfunded liabilities are promises or obligations for future payments that do not have corresponding funds set aside to cover them. Think of it like making a promise to pay for something tomorrow, but not having the savings to cover that future expense.  For the U.S. government, these liabilities primarily consist of future payments for programs like Social Security, Medicare, and federal employee pensions. While these programs are essential for millions of Americans, the funds currently set aside (or projected to be collected) are not sufficient to cover the expected future payouts.

Why does it matter?  The gap between what the government promises to pay and what it's expected to afford is a concern for several reasons:

1. National Debt: Unfunded liabilities contribute to the national debt. As the government borrows more to meet its obligations, this increases the debt burden, which can have various economic implications, including potential tax increases and reduced government spending on other services.
2. Economic Stability: Large unfunded liabilities can lead to questions about the government's ability to meet its future obligations, which might affect the country's economic stability and creditworthiness.
3. Personal Financial Planning: For individuals, especially those nearing retirement, changes in government programs due to unfunded liabilities could affect plans for retirement. It's important to stay informed and plan accordingly.

Looking Ahead & Potential Fixes

You’ve probably heard something along the lines of “Social Security being insolvent in less than decade.”  It’s both right and wrong, but I won’t get into that in blog.  I will say that addressing unfunded liabilities requires difficult choices, such as reducing benefits, increasing taxes, or altering eligibility criteria. These decisions can be politically challenging, but they are essential for the long-term financial health of the country.

The best fix I have heard is from Jeff Gundlach, CEO of DoubleLine Capital.  He proposes (as many before him) raising the retirement age.  Everyone over 50 years old has no changes.  Everyone under 50 has about 6 months added to their timeline to reach full retirement age until it gets to age 75.  This may seem draconian to some, but one must remember that when Social Security was set up, the average life expectancy in the US was in the mid sixties.  Now the average life expectancy is in the high seventies.  Programs designed when facts were different must adapt to changing facts of the present.

Those under age 50 have more time to adjust their planning and save commensurately for that change/delay in a benefit payment.  I will be 36 next month.  I like to joke with my wife that I plan to live until 120 (although I just adjusted my life insurance in case I am wrong).

As your financial advisors, we're here to help you navigate these complexities. We'll continue to monitor these developments and guide you in making informed decisions about your financial future. Remember, while these issues are significant at the national level, your personal financial planning remains our top priority. We're committed to working with you to ensure your financial plan is robust, flexible, and tailored to withstand various economic scenarios.

Stay informed, stay prepared, and as always, feel free to reach out with any questions or concerns.