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Blue Model Blues
U.S. Pension Shortfall: $3.4 Trillion

Every few months, another think tank or financial institution releases a new report sounding the alarm about the fiscal crisis facing state and local pension funds, and the findings are reliably dismissed by public sector unions and their political backers. But the latest research, from researchers at Stanford’s business school, is hard to ignore. The Financial Times reports:

The US public pension system has developed a $3.4tn funding hole that will pile pressure on cities and states to cut spending or raise taxes to avoid Detroit-style bankruptcies.

According to academic research shared exclusively with FTfm, the collective funding shortfall of US public pension funds is three times larger than official figures showed, and is getting bigger.

… Joshua Rauh, a senior fellow at the Hoover Institution, a think-tank, and professor of finance at the Stanford Graduate School of Business, who carried out the study, said: …“It is quite likely that over a five to 10-year horizon we are going to see more bankruptcies of cities where the unfunded pension liabilities will play a large role.”

Surveying the pension landscape today gives every reason to think that Rauh’s dire prognostication will turn out to be right: California’s pension fund is devoting its energies to green social activism even as it fails to meet its investment targets year after year; the Illinois Supreme Court recently ruled, in essence, that the state constitution prohibits Chicago from overhauling its woefully underfunded pension system; and a proposed federal law requiring states and localities to accurately disclose the scale of their obligations looks unlikely to make it through Congress.

There are still policy changes that can and should be undertaken to stave off a pension meltdown: cities can transition to 401(k)-style defined contribution plans for new employees, they can manage their pension funds more competently, and they can curtail the power of public sector unions in the political process, so that there is less pressure on feckless politicians to make promises they can’t keep. But absent sweeping reform or white-hot stock market growth, Rauh is probably right that more cities will follow San Bernardino, Detroit and Puerto Rico into bankruptcy. And Congress needs to start thinking about how it will manage the fallout.

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