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I have long written of “unfunded liabilities” the U.S. government ignores in its debt calculations; that is, aside from the $17.1 trillion of “national debt” and $5+ trillion of “off balance sheet” obligations of state-owned housing agencies as Fannie Mae and Freddie Mac.  Estimates of unfunded liabilities range from as low as $50-70 trillion, to as high as $200 trillion – according to Lawrence Kotlikoff; and even $238 trillion, according to Niall Ferguson.  The concept involves future anticipated payments to Social Security, Medicare, and the Medicare Prescription Drug Program, and Military and civil servant pensions; while the wide disparity in calculated amounts is a function of assumptions regarding economic growth, discount rates, and demographics.

However, as is the case with any economic assumptions these days; the closer one is to the establishment, the more optimistic the projection.  And over the past five years, siding with the establishment – be it the Fed, ECB, BOJ, or IMF, among others – has been a decidedly losing proposition.  To wit, not only have consensus growth forecasts been falling for as far as the eye can see, but “GDP” measures have been so badly mangled by “massaging,” it’s difficult to even make comparisons.  Moreover, given governments’ inherent incentive to underestimate inflation – and thus, overestimate real GDP; suffice to say, all such measures greatly overstate actual progress.

Diff in 2014 Consensus

Irrespective of accounting shenanigans, such numbers are as massive as they are real; and strangely, the MSM doesn’t spend a second discussing them.  Most financial writers are too limited in economic knowledge to understand such a complex issue; and equally important, have been brainwashed to believe such obligations will be “grown into” in future years.  Sadly, even America’s most prosperous historical periods couldn’t generate enough income to cover such shortfalls – particularly because the stronger the growth, the higher rates would rise.  In essence, erasing the benefits of above average growth, given the massive fixed income positions held by both retail and institutional investors.  Then again, now that America’s manufacturing base long ago left for points east, even discussing above average growth has become ludicrous.

Worse yet, America faces structural changes that make it impossible to prevent such liabilities from dramatically rising.  First off, the demographics of expanding baby boomer retirements expose the Ponzi schemes that are “pay-go” programs – like Social Security.  Not to mention, the 35-year low in the Labor Participation Rate, and a “new employment paradigm” featuring an increasing share of part-time, temporary, and minimum-wage workers.  In other words, with the proportion of full-time workers (FTEs) plunging versus the amount of beneficiaries, there simply isn’t enough money coming in to fund what’s going out.

Throw in the fact that decades of Social Security surplus have been spent by a profligate government with little care for its constituents’ rights, and you can see why Social Security and Medicare will collapse if FICA taxes are not dramatically increased, or benefits dramatically decreased.  Regarding the latter, nothing would impoverish “the 99%” more in today’s high inflation environment; particularly given the “turbo-boost” medical costs are about to receive when Obamacare is fully implemented.


As you can see Social Security costs alone – due to the aforementioned decline in payers/payees and rising inflation – have risen from 6% of private wages and salaries in 1970 to nearly 14% today.  And given current demographic and inflation trends, I’m sure you can guess which way this chart will be trending.  Sadly, that’s just Social Security; as Medicare, the Medicare Prescription Drug Program, and Military and civil servant pensions must all be considered as well.  Clearly, the aging baby boomers – plus Obamacare – will put a terrible strain on the healthcare system; and given all the wars we recently participated in – from Vietnam to Iraq, and everything in between; utterly enormous military pensions will need to be paid out.  Finally, given the government is now the largest employer in America, the “civil servant pension” line item is set to soar as well.

SS Cost Private Wages

Thus, when considering the U.S. “debt,” one must not fail to incorporate its various facets – both on and “off balance sheet.”  Such liabilities can only increase in a debt-addicted society, particularly with unfavorable demographics and an increasing leaning towards socialism.  Understanding these costs makes the argument that much more powerful for owning physical Precious Metals; and equally important, exiting dollar-based assets that must be diluted to cover such debts.  In other words, the arguments for “QE to Infinity”; “debt ceiling to infinity” and “ZIRP to Infinity” are rendered exponentially more powerful.  And thus, I conclude by saying beware of what lurks below the surface.  Captain Smith of the Titanic ignored such risks; will you?