This is the companion blog to the website.

Tuesday, May 4, 2010


What in blazes is semi-hard debt? Semi-hard debt is made up of government obligations taxpayers are now expected to cover, but of which they are largely unaware. It's a termite colony inside taxpayers' wallets.

Semi-hard debt is composed primarily of retirement benefits government has promised its employees but has not saved.

It's a big chunk of change - about $8 trillion or $70,000 of additional government debt for a typical American family of three generating $75,000 of annual income (1).

Federal employees are responsible for $5.3 trillion(2) Because the books of state and local governments are a motley bunch, no one really knows how much they've run up.

It is not less than $1 trillion and some suggest that it could be $3 trillion. is currently using $2.4 trillion(3).

For perspective, $70,000 per family is roughly equal to one additional college education for each.

The money is not yet spent... It promised to do so. Government employees are counting on them to do so. But in fact, this money has not yet slipped through government's fingers.

...but it is growing. This $70,000 for Mr and Ms Middle America is the amount necessary to invest today to grow large enough to make a stream of payments on many tomorrows. It is a "present value" of the retirement obligations.

So, if the money is not set aside today (it isn't) the amount necessary to make the retirement payments grows by the rate of interest each year. It increases like an unpaid mortgage.

Assuming an interest rate of 5%, that $70,000 taxpayer debt will be $73,500 next year, $77,175 the following year in addition to whatever new unfunded retirement obligations government promises

How Big is the Family Tax Hit? If taxes are collected tomorrow as they are today, the tax bill for Ms and Mr Middle America will rise by a minimum of $3,800 annually to pay it off(4).

Who Takes the Hit? Right now, all knowledgeable parties in officialdom expect taxpayers to pay up. Taxpayers, however, haven't been fully informed of this particular invoice.

Once taxpayers are knowledgeable parties, too; this being America, it seems unlikely they will simply plunk down the cash, shake hands, and walk away.

The legal requirement that taxpayers cough-up for semi-hard debt is certainly more compelling than it is for soft debt. Nonetheless, the case for taxpayers to pay semi-hard debt is not etched in stone as deeply as it is for hard debt.


VIDEO: For a terrific 30 minute summary of underfunding of state pension, see the interview with Orin Kramer posted by the Financial Times.  Mr. Kramer is a Democratic Party heavyweight, top tier businessman and chair of the New Jersey State Investment Council, which manages New Jersey's public pension funds.   That site does not post direct links so:   \

* Go to
* In the search box in the upper right corner type "Orin Kramer", select video in the box immediately to the right, click on the "Search" button,
* Click on the clip titled "Feb 18: Orin Kramer of the New Jersey State Investment Council (14m 21 sec)"



(1) Government has run up roughly $1,000,000 of unfunded liabilities for typical US family described in the article. Refer to post on this blog of 25 Feb 2010 entitled "Average US Family Owes $1 Million in Government Obligations. No Kidding." for details

(2) From 2009 Financial Report of the US Government, pg xiii, table entitled Nation By The Numbers, available from

(3) The Trillion Dollar Gap, Pew Center on the States, available at

The $3 trillion comes from Robert Novy-Marx and Joshua Rauh in NBER working paper No. 14343 titled The Intergenerational Transfer of Public Pension Promises available at, and referenced in Barrons article of 15 March 2010 entitled The $2 Trillion Hole available at  I expect to refine the $2.4 trillion estimate as the picture clarifies.

(4) To arrive at a $3,800 annual typical tax increase I make the courageously optimistic assumption that there are no further increases in unfunded liabilities and that current balances are paid off over a 50 year amortization schedule at 5% annual interest rate.