Unfunded Liability
The dollar amount by which a pension plan's liabilities exceed its assets.
In Detail
Unfunded liability represents the gap between what a pension plan has promised to pay and what it actually has on hand. If a plan has $70 billion in assets but $100 billion in projected obligations, the unfunded liability is $30 billion. This shortfall must eventually be closed through some combination of higher employer contributions, improved investment returns, or reduced future benefits. Unfunded liabilities have grown dramatically across the United States, with state and local pensions collectively carrying over $1 trillion in unfunded obligations by some estimates.
The size of the unfunded liability matters both in absolute terms and relative to the sponsor's ability to pay. A $5 billion shortfall might be manageable for a large state but catastrophic for a small municipality. Unfunded liabilities also carry an implicit interest cost — the gap typically grows over time because the plan must still pay the assumed rate of return on money it does not have.
Frequently Asked Questions
What does Unfunded Liability mean in pension finance?
The dollar amount by which a pension plan's liabilities exceed its assets.
Why does Unfunded Liability matter for my retirement?
Unfunded liability represents the gap between what a pension plan has promised to pay and what it actually has on hand. If a plan has $70 billion in assets but $100 billion in projected obligations, the unfunded liability is $30 billion. This shortfall must eventually be closed through some combinat...