Unfunded Liabilities: Are We Borrowing From Future Generations?

Intergenerational Burden?

The future of the United States economy, and perhaps the equity between generations, presents an immense challenge and choice with how to manage fiscal responsibility for unfunded liabilities. The National Debt is a frequently discussed topic and people have a general awareness that it should be managed intuitively. By its very nature it is a common topic in the financial zeitgeist, much like the choppy white water on the ocean’s surface. Unfunded Liabilities though are like a hidden current beneath a calm surface, these commitments represent promises made today that lack a clear, fully funded pathway to fulfillment and are a less frequently discussed topic that may not gather attention. A segment that appeared on “60 Minutes” with Federal Reserve Chairman Jerome Powell discussed the economy and if the National Debt is a danger to the economy. Powell denoted that in the long run “the US is on an unsustainable fiscal path” and that we are “borrowing from future generations.” To be fair this question was related to the National Debt and does not even address Unfunded Liabilities which only compounds the challenge. This begs to question whether the current generation is making a “Faustian Bargain,” are we trading long-term societal health and prosperity for short-term comfort by deferring policy decisions.

To answer this question, we must first understand what unfunded liabilities are, their colossal scale, how they fit into the overall fiscal health of our country, and their implications for the future.

What are Unfunded Liabilities?

In simple terms, an unfunded liability is a future financial obligation for which there is no sufficient pre-existing asset or dedicated revenue stream. Unlike the national debt, which represents accumulated past borrowing, unfunded liabilities are projections of future shortfalls in programs the government is legally or morally committed to. These often involve long-term entitlement programs where the present value of future promised benefits far exceeds the present value of projected future revenues.

Main components of the U.S. Unfunded Liabilities:

• Social Security: The Old-Age and Survivors Insurance and Disability Insurance (OASDI) programs, which provide retirement, disability, and survivor benefits.
• Medicare: The federal health insurance program for people 65 or older, certain younger people with disabilities, and people with End-Stage Renal Disease (ESRD). This includes Hospital Insurance (Part A), Supplementary Medical Insurance (Part B), and Prescription Drug Coverage (Part D).
• Federal Employee and Military Retirement Benefits: Pensions and other post-retirement benefits for civilian federal employees and military personnel.
• Veterans’ Benefits: Compensation, pensions, healthcare, and other support for veterans and their families. These are not merely accounting entries; they represent promises made to millions of Americans—promises that, under current law and demographic projections, cannot be met without significant adjustments.

The Colossal Bill: Quantifying the Unfunded Commitments

The scale of these unfunded liabilities is staggering, dwarfing the already formidable national debt. The most comprehensive and authoritative source for these figures is the Financial Report of the United States Government, prepared annually by the U.S. Department of the Treasury in coordination with the Office of Management and Budget (OMB), and audited by the Government Accountability Office (GAO) [1]. It is crucial to note that these figures are typically presented as “present values” over a 75-year projection period, meaning future shortfalls are discounted to their equivalent value in today’s dollars.

As of the 2024 Financial Report of the United States Government (released February 2025) [1]:

• Total Social Insurance Net Expenditures (primarily Social Security and Medicare): This combined shortfall represents the largest portion of the nation’s unfunded liabilities. For Fiscal Year 2024, this amounted to approximately $78.3 trillion over a 75-year projection period [1]. This figure alone is more than twice the total annual Gross Domestic Product (GDP) of the entire U.S. economy.

Let’s break down the two giants within this category:

• Social Security (OASDI): The 2024 Social Security Trustees’ Report indicates an unfunded obligation of approximately $25.4 trillion over the 75-year projection period [2, 3]. Without legislative action, the Old-Age and Survivors Insurance (OASI) Trust Fund is projected to be able to pay 100 percent of scheduled benefits until 2033. After that, it will only be able to pay about 79 percent of scheduled benefits from continuing income [3].

• Medicare (Parts A, B, & D): Medicare’s unfunded liability is even larger. The 2024 Medicare Trustees’ Report projects an unfunded obligation of approximately $52.8 trillion over the 75-year period [1, 3]. The Hospital Insurance (HI) Trust Fund (Medicare Part A) is projected to be able to pay 100 percent of scheduled benefits until 2036, after which it will be able to pay about 89 percent [3]. Medicare’s financial challenges are exacerbated by rising healthcare costs and an aging population.
Beyond these primary social insurance programs, other significant unfunded commitments contribute to the overall fiscal picture:

• Federal Employee and Veteran Benefits Payable: These represent accrued liabilities for pension and other post-retirement benefits for civilian federal employees and military personnel, as well as veterans’ compensation and burial benefits. The 2024 Financial Report of the United States Government reports $15.0 trillion for “Total Federal Employee and Veteran Benefits Payable” on the government’s balance sheet [4]. It is important to distinguish that this is a balance sheet liability, reflecting accrued benefits to date, rather than a 75-year actuarial projection of all future shortfalls like Social Security and Medicare. However, it still represents a significant long-term commitment that needs to be funded.

• Other Unfunded Plans and Liabilities: While less dramatic in scale compared to Social Security and Medicare, other programs carry unfunded aspects. Examples include certain aspects of Medicaid (a jointly funded federal-state program where federal mandates can create unfunded burdens on states), and some federal loan programs or insurance commitments where future payouts could exceed reserves. The concept of “unfunded mandates” on states, for instance, like those related to environmental regulations or disability access, effectively shifts federal obligations to local governments, creating their own set of fiscal challenges [5]. Due to the diverse nature of these obligations and the varied methods of accounting for them (ranging from spending projections to contingent liabilities or balance sheet entries), there isn’t a single, universally accepted, aggregated dollar amount for “Other Unfunded Plans and Liabilities” that directly compares to the 75-year present value projections for Social Security and Medicare. While they contribute to the nation’s broader fiscal challenges, the most authoritative reports primarily focus their explicit “unfunded liability” calculations (in terms of present value of future shortfalls over 75 years) on the major entitlement programs of Social Security and Medicare.
When considering the total picture of long-term fiscal imbalance, beyond just Social Security and Medicare, some broader analyses, such as those from the Penn Wharton Budget Model, project an “infinite horizon fiscal imbalance” (covering all current and future generations) that could reach $162.7 trillion as of 2024 [6]. This figure underscores the true magnitude of the nation’s fiscal challenge.

Unfunded Liabilities in the Context of the National Debt

It’s crucial to understand the relationship between unfunded liabilities and the national debt. The national debt is the total accumulated outstanding borrowing by the U.S. Federal Government over the nation’s history. As of May 8, 2025, the U.S. national debt stands at approximately $36.21 trillion [7]. While the national debt is the sum of past deficits, unfunded liabilities represent promises for future spending that are not yet financed or due. However, they are deeply intertwined. As entitlement programs like Social Security and Medicare mature, their unfunded portions translate into increasing demands on the federal budget. When current revenues are insufficient to cover these mandated benefits, the government must either increase revenue by raising taxes, or borrow to make up the difference, thereby adding to the national debt. The national debt is the manifestation of yesterday’s unfunded promises and ongoing spending decisions. Unfunded liabilities are the future promises that, unless addressed, will become tomorrow’s addition to the national debt. This perpetual cycle creates a growing burden.

The Impact on Future Generations: A Faustian Bargain?

The profound question at the heart of this fiscal dilemma is whether current generations are making a “Faustian Bargain” with future generations.

Faustian Bargain:
The term “Faustian Bargain” originates from the classic German legend of Faust, a scholar who, disillusioned with the limits of human knowledge, makes a pact with the demon Mephistopheles (i.e., Deal with the Devil). In exchange for limitless knowledge, worldly pleasures, and power for a set period, Faust agrees to surrender his soul to the devil. The essence of a Faustian bargain is a trade-off: an immediate, often enticing benefit or power, at the cost of something valuable, often an intangible, moral, or spiritual value eventually. The bargainer often recognizes the malevolent nature of the deal and its ultimately tragic or self-defeating outcome [8].

Answering the Question?

Are current generations, by failing to address the growing unfunded liabilities, effectively making a Faustian bargain? The “immediate benefit” is the continued receipt of promised Social Security, Medicare, Pensions, and other benefits to current generations without politically painful reforms and in essence transferring that burden to future generations. So unlike Faust who received the benefit and had to deal with the consequence, the current generation will receive the benefit without the consequence. Meaning the current generation can pass the consequences on by doing nothing.

Americans should expect promises made to be kept, and short falls in funding are a recurring no fault event. However, if the goal is to promote long term health and prosperity than something should be done. Politicians aren’t motivated to push to address this political third rail that would involve either raising taxes, cutting spending, reducing benefits, raising eligibility ages or likely a combination of these. So much like the song Freewill by the band Rush, “If you choose not to decide, you still have made a choice.” By doing nothing, the current generation is passing this burden on.

What happens if we don’t address?

This may be more of a moral dilemma than fiscal question as the fiscal health and economic opportunity of future generations is at stake with the most severe impact on future generations. If unchecked, the escalating unfunded liabilities will lead to:

• Higher Taxes: Future generations will likely face higher taxes to cover these mounting obligations. This could stifle economic growth, reduce disposable income, and limit their ability to save and invest.
• Reduced Government Services: As a greater portion of the budget is consumed by mandatory entitlement spending (making up large portions of the unfunded liabilities) and interest on the debt, less funding will be available for other crucial public services like education, infrastructure, research and development, and national defense—investments that are vital for future prosperity and competitiveness.
• Slower Economic Growth: High levels of public debt and unsustainable entitlement programs can crowd out private investment, and lead to slower overall economic growth. This means future generations will inherit a less dynamic economy with fewer opportunities.
• Intergenerational Inequity: The burden is disproportionately shifted to younger and future generations, who will pay into systems that may offer them fewer benefits than the US is currently providing. This raises fundamental questions about fairness and the social contract between generations.
• Reduced Fiscal Flexibility: The government’s ability to respond to unforeseen crises (economic downturns, pandemics, wars) will be severely constrained if a large portion of its budget is already locked into mandatory spending and debt service. How can this be addressed? In short, not very easily. The pathway to addressing would likely require a combination of policy choices that include:
• Reforming Entitlement Programs: This could involve adjusting eligibility ages, modifying benefit formulas, introducing means-testing, or reducing benefits for programs like Social Security and Medicare.
• Controlling Healthcare Costs: Addressing the underlying drivers of healthcare inflation is critical for the long-term solvency of Medicare. Finding efficiencies will mitigate the risk.
• Increased Revenue: This might involve tax increases and must be balanced carefully to consider the impact on economic growth.
• Economic Growth: A stronger economy generates more tax revenue and helps to manage debt more effectively. Economic growth will ease fiscal challenges across the board.

What is the Cost?

The 2024 Financial Report of the U.S. Government highlights a “75-Year Fiscal Gap” of 4.3% of GDP [1]. This means there is a short fall in revenue to fund programs that will require some combination of reduced spending, reduction in services, higher taxes, and hopefully some higher revenue due to growth. To truly grasp the magnitude of this challenge, let’s contextualize and estimate per citizen in Table 1. Using a rough estimation if we apply that 4.3% gap to a 40 hour working week you get about 1.72 hours a week of extra contributions needed to pay for the gap.

Table 1

Conclusion

It is right to be skeptical of 75 year government estimates, and a lot can happen and change in that period. However, the challenges are very real and will ultimately manifest themselves in unpleasant ways unless acted upon. Like the seemingly harmless slow drip of water that over time can be tremendously powerful carving canyons and moving mountains. The moral dilemma of addressing the issue head on or pushing it to another generation will present difficult choices for citizens and leaders. The solutions will likely require making tough trade offs and sacrifices. The Faustian Bargain of immediate gratification and deferring tough choices shifts the primary cost, long-term well-being and opportunities on to future generations. Ignoring this challenge today has ethical and economic ramifications that will resonate for decades.

The challenge is immense, but not insurmountable. The question is whether today’s leaders and citizens possess the foresight, will, and courage to confront these head-on, or if we continue to make a Faustian bargain, leaving future generations to pay the price. The choices we make today will define the economic destiny and intergenerational equity of tomorrow.

References

[1] Treasury: 2024 Financial Report of the United States Government. https://fiscal.treasury.gov/files/reports-statements/financial-report/2024/full-financial-report.pdf
[2] Social Security Administration (SSA): 2024 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. https://www.ssa.gov/oact/tr/2024
[3] U.S. Department of the Treasury: Fact Sheet: 2024 Social Security and Medicare Trustees Reports. https://home.treasury.gov/system/files/136/TR-2024-Fact-Sheet.pdf
[4] Treasury: Note 13. Federal Employee and Veteran Benefits Payable from the 2024 Financial Report of the United States Government notes section. https://fiscal.treasury.gov/files/reports-statements/financial-report/2024/notes-to-the-financial-statements13.pdf
[5] Wikipedia: Unfunded Mandate https://en.wikipedia.org/wiki/Unfunded_mandate
[6] Penn Wharton Budget Model: Complete Measures of U.S. National Debt. https://budgetmodel.wharton.upenn.edu/issues/2025/1/27/complete-measures-of-us-national-debt
[7] Treasury: Understanding the National Debt. https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/
[8] Britannica: Faustian bargain. https://www.britannica.com/topic/Faustian-bargain
[9] United States Census Bureau: U.S. and World Population Clock. https://www.census.gov/popclock/