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European Periphery Woes Come To America

Americans should avoid any feelings of smug superiority about the problems in Europe’s periphery. It’s time for the U.S. to be worried about its “own peripheries”, according to the Financial Times. This FT report talks about underfunded pensions and state and local debt in the same terms it has used for Greece and Portugal.

If the report is correct, the problems are truly enormous. Some estimate that state and municipal bonds are underfunded by $4 trillion, while other experts believe that this is only the tip of the iceberg. Worse, the true level of these pension liabilities is shrouded in secrecy; until very recently, the SEC hasn’t put pressure on states to tell bondholders the full extent of their liabilities. Many states have been reluctant to come clean, and even when they have complied with SEC demands, their assessment of their ability to pay is hopelessly rosy and based on outdated assumptions about investment returns.

Private sector executives would be jailed for securities fraud if they even approached the levels of deceit that state and local governments routinely indulge in. Transparency in accounting should be the first demand of both citizens and investors. Hopefully the SEC will keep up the pressure on these governments to reveal the true state of public finances, before America gets dragged into a European-style debt trap of its own.

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  • Fred

    I wish I had kept the clipping, but perhaps one of your minions can find a microfiche somewhere. Alas, the Trenton Times does not have a full on-line archive.

    About 10 years ago, New Jersey was having one of its periodic, if ineffectual, fits of worrying about pensions. The state auditor testified to the legislature that they had promised increased pensions without providing any way to pay for them and that the time had come to pay up.

    One of our august legislatrices responded, “But no one told us we had to pay for it!”

  • Alex Weiner

    Pensions are regulated by the PBGC not the SEC which regulates broker-dealers and publicly traded companies. In any case, its far to late to avoid deep trouble. Most funds need returns in excess of 10% just to break even in the coming years. The mismatch in duration will only make this worse as interest rates creep back up.

  • Jim.

    Hopefully the necessary reforms will be made soon, so that the irresponsible voters of the Baby Boom generation will be among those who have to pay for these problems, instead of just sticking it to my and my kids’ generations.

  • Lexington Green

    That large and misshapen cloud you now see on the X-ray is the long-denied tumor that will kill off the Blue Model.

  • EvilBuzzard

    But, but, but
    …American Exceptionalism,
    Hope and Change!,
    It can’t happen here….

  • EvilBuzzard

    @3 – That’s a little like hoping Al Gore will save the cute and cuddly Teddy-Bears, while he soaks in his indoor, heated swimming pool and sips a mint julip.

  • Kenny

    Well, it looks ike those that lived on the government dole during their ‘working’ career will have to do with much less than they expected in their retirement years.

  • Peter M. Todebush

    ERISA (Employment Retirement Income Security Act) requires accrual accounting for the private sector but not the public sector. Interesting that the politicians demand accounting standards (Sarbanes Oxley) for everybody but themselves. Unfunded liabilities for the entitlements would not be the problem they have grown into with accrual accounting.

  • Eurydice

    @Alex #2 – WRM isn’t talking about the SEC regulating pensions. He’s taking about the regulation of municipal bonds.

  • La Marque

    Alex Weiner: the PBGC is the private sector’s backup and is funded by companies that pay premiums to the PBGC. State and other local governmental units are not covered by the PBGC. They are responsible to their own state or local authorities only. The SEC has jurisdiction because these entities issue bonds and other securities.

    per the link you posted:
    PBGC is a federal agency created by the Employee Retirement Income Security Act of 1974 (ERISA) to protect pension benefits in private-sector defined benefit plans – the kind that typically pay a set monthly amount at retirement.

  • Charles R. Williams

    Municipal debt is held by individuals and not by banks. So unless a large percentage of that $4T defaults, there will be no repercussions to the economy as a whole. With respect to public pensions, cuts are underway in many states. The brunt of the cuts affect future retirees. The real threat to state solvency is the Obamacare expansion of Medicaid.

    But at the federal level there is nothing backing entitlement promises other than the capacity to tax the American people. These promises are COLAed so they cannot be inflated away. The demand for treasury debt is not infinite. If they are cut back suddenly in an austerity program, the economy will collapse. If taxes are raised to pay them the economy’s capacity to support entitlements will shrivel. Greece is less than a decade away unless the problem is addressed immediately.

  • Tom Holsinger

    Typographical error here:

    “”… Some estimate that state and municipal bonds are underfunded by $4 trillion …”

    Change “bonds” to “pensions”.

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