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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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  • Andrew Allison

    The first and, given a responsible Congress, easiest step is to apple ERISA disclosure regs to Public Pension funds.

    • f1b0nacc1

      Of course you do realize that the next order of business would be cleaning up the mess from the lynchings of public officials that would quickly follow.

      • Tom

        That’s a feature, not a bug.

      • Wild Bill Kinda

        I have a hose.

  • wri

    This assumes the courts won’t decide that the taxpayers have to pay for the profligate promises of the politicians who harvested the votes of the public employees, even if the state or governmental entity doesn’t have the funds to pay these obligatioms. Even to he point that a newly hired employee has a locked in right to whatever generous benefits are in the current union contract for entire 30-40 years of that employee’s employment — as the Illinois Supreme Court has held. The new emplayee can get increased pension benefits if the government will agree. But even the union cannot agree to a future pension that will reduce the generous pension to be accumulated over 30 years of employment that happened to be in effect when the employee was hired. Welcome to Never-Never land and the common citizen be damned. You exist to further the interests of your political representatives and the public employees you may (naively)have thought worked for you. If your politicians agreed to pay for pensions that could not be realistically paid without a very substantial increase in taxes ( without of course telling you about this), then the courts will order the governmental entity to impose taxes sufficient to meet these obligations. The analogy in the private sector would be that if you happened to be hired when a very generous pension program was in effect, you would expect that you would get the benefits of that program so long as you were employed and making contributions under that program. You would not expect that, if the projected costs of the pension program became so high that the company could not realistically meet the costs, it would be unable to change the pension program yet still be required to continue a bankrupt business. This can’t happen under the legal principles applicable to private businesses because you can’t force a business to pay out money it simply doesn’t have. But for public employees, some courts say the rules are different: Even though the pension deals promised by political office-holders in collusion with unions are financially irresponsible given the financial resources of the public entity, the taxpayers are nevertheless required to make up the shorfall to fund these expensive pensions over the many years of their payout. And even though it has become apparent that the pension program is financially unsustainable, its,generous terms cannot be changed even for the future for any current employee. Just because the taxpayers are there to assume the loss, so the public employees don’t have to,lose any of their overly generous pension.

    This is something of rant, fueled by the fact that I think the situation is outrageous. As the truth becomes known, I think even liberal Democrats will rebel. What makes no sense cannot continue indefinitely.

  • CosmotKat

    Let them fail and let those who have enjoyed the tax payer funded largess experience that which the private sector has experienced when their 401K plans are impacted by market circumstances…a loss or reduction of their benefits. If this is unpalatable then it is incumbent upon politicians, in order to protect tax payers, to eliminate public sector unions. Government union activism is a detriment to society at large and to the tax payer specifically. No more pensions for public employees. Let them fund their own retirement using their own earnings just like everyone else.

  • Daniel Nylen

    As long as citizens have the ability i the Us of freely changing states, many will leave those Blue states that have tremendous pension debts for other more fiscally responsible states. Will some states go into a “death spiral” or will the US bail them out? Who knows– I have opined that one legislature cannot bind a future legislature, so each legislature need to pay its own debts. However this idea, prevalent in the no budget deficit provisions of all states, has been washed out somehow by courts.

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