It’s common for reports on states’ pension deficits to throw around figures in the hundreds of millions, the billions, or even the tens of billions. But according to a new estimate of California’s pension hole from the Stanford Institute for Economic Policy Research, it’s time to bring out the t-word. The Orange County Register reports:
Preliminary calculations from a forthcoming SIEPR study peg the unfunded retirement tab for state and local government employees at more than $1.2 trillion, according to Insolvent Film, a website based on a documentary on government financial stability.
The $1.2 trillion-plus deficit includes approximately $950 billion in unfunded pension liabilities and about $300 billion in other post-employment benefits (primarily retiree health care). The total translates to roughly $30,650 for every man, woman and child in the state – about $123,000 for a family of four.
The figures are substantially higher than official government estimates… The difference, as Stanford public policy professor Joe Nation explained to Insolvent Film, is that public pension systems base their financial estimates on unrealistic assumptions about investment rates of return. CalPERS expects to earn 7.5 percent a year, for example.
Other recent reporting doesn’t inspire confidence that the Golden State’s pensions are in the best of hands. The San Francisco Chronicle reported Monday that a county in California’s East Bay has guaranteed its top public administrator an annual lifetime pension of more than $500,000 per year once she retires. And as Governing magazine reported earlier this month, California’s largest pension fund is devoting its energies to green social activism even as it continues to fall far short of its investment targets.
With California’s pension debt now approaching 60 percent of the state’s GDP—and rising—it’s clear that tinkering around the edges won’t be enough. The confluence of powerful public sector unions, dishonest politicians eager to pander to them, and incompetent investing and accounting probably makes the defined-benefit pension status quo unsustainable in the long run. In order to bring state and local liabilities back under control—and in order to bring public employee benefits back in line with those available to ordinary taxpayers—California should transition to defined contribution 401(k)-style retirement plans for its public workers.
In the meantime, as the severity of these deficits is laid bare, the U.S. Congress should hold hearings—not only on how things were allowed to get this bad, but on what it plans to do once state and local governments start approaching Washington, Puerto Rico-style, for massive bailouts. Will any assistance be forthcoming, and if so, on what terms?