jmherbenerAn unfunded liability is when someone is obligated to make future payments but does not own assets that generate sufficient future revenues to meet his obligations. A pension fund, for example, pools contributions to the fund and makes investments with the money that generate returns in the future to pay the fund’s obligations. If a pension fund has an unfunded liability, it is measured by the present value of the shortfall in paying the future stream of obligations. That is, the present amount of money that the pension fund would need to invest to generate enough revenue in the future to make up the shortfall.
Take a look at Gary North’s explanation of the calculation:
http://www.garynorth.com/public/804print.cfm
North claims that the current unfunded liabilities of the federal government (i.e., the present amount of money the federal government would need to invest to generate a future stream of revenue sufficient to pay its obligations like social security, medicare, etc.) is $222 trillion.
http://mises.org/daily/6192/Means-Testing-Your-Social-Security-Payments