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Blue Model Blues
Pension Debt Exceeds 40k Per Household

According to a first-of-its kind pension-tracking website created by a team at Stanford’s Institute for Economic and Policy Research, America’s unfunded pension liabilities—the difference between the value of state pension funds and the amount owed to public sector workers—totals over $4.8 trillion, or $41,219 per household. The Stanford team arrived at number assuming a three percent rate of return—far lower than the 7.5 percent “actuarial” rate many pension funds rely on, but rarely meet. (Even if the actuarial basis were accurate, state pension funds would still owe a combined $1.04 trillion, or $8,872 per household).

The findings highlight the fact that state pension shortfalls are not some marginal worry, but one of the most pressing fiscal problems facing the United States—quite possibly more urgent than the U.S. federal debt. Because while the federal debt is higher (at $19 trillion), federal tax revenues are several times larger, as well. Moreover, the federal government, unlike states, can issue debt in its own currency (currently at record-low rates) and even print money to cover its obligations. And while the federal debt as a percentage of GDP has increased at an alarming rate over the past several years, pension debt has grown even faster. Nonetheless, journalists and public officials devote far more of their energies to thinking about the federal government’s fiscal imbalance than the equally destructive ones besetting state retirement systems.

Of course, the $4.8 trillion figure is a sum of all 50 states’ shortfalls. Some state systems are relatively stable, or will be with minor tweaks; other states are already taking promising steps to overhaul theirs (especially by declawing public sector unions and moving to 401(k)-style retirement systems for public employees); and other states’ taxpayers may be willing to bail out pensioners once the current systems go belly-up. But it seems increasingly likely that the states and localities in the most dire straits will one day be forced to approach the federal government for a bailout, Puerto Rico-style. In the short run, Congress should make policy changes to minimize this risk—but in the long run, it should start planning for how to manage the fallout of the looming pension meltdown. Will any federal assistance be forthcoming, and if so, on what terms?

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  • CosmotKat

    Why should tax payers be on the hook for public sector union employees? When my 401K sinks I do not have public sector union employees propping up my portfolio. End public sector unionism and let civil servants supplement their retirement like everyone else with pre or post tax income in 401K accounts.

    • Tom

      The only reason to do so is the sanctity of contracts. Other than that? Nothing.

      • CosmotKat

        Sanctity of contracts? It seems to me the sanctity of contracts are ignored when it suits those in power. I seem to recall a certain car company bailout……

        • Tom

          I won’t disagree with you. But playing the game by their rules means we lose.

          • CosmotKat

            Good point, but in this case who loses? The tax-payer is who I am assume you are referring to. And we always lose when the government is involved.

      • Matt_Thullen

        The sanctity of contracts gets tossed out in bankruptcy proceedings, which is where most of these pension funds are headed. The only uncertainty is how to handle the de facto bankruptcy of a state, as the bankruptcy code doesn’t address this problem. It will be fascinating to see if a federal or state judge would order a state to impose the kind of massive tax increases needed to fund ongoing pension payouts.

        Especially if that judge (assuming it’s a state judge) is elected.

        Otherwise deals will be struck between the fund creditors, as is the case with Detroit’s bankruptcy. To the extent that a bankruptcy judge puts his or her thumb on the scale to favor pension holders at the expense of other creditors, then wish government entities the best of luck borrowing money at decent interest rates in the future.

      • Andrew Allison

        The contracts entered into between municipalities and public sector unions are subject to the same laws, specifically Federal bankruptcy laws, as any other contract. IL, the congressional delegation of which has been trying desperately to broaden the PR bailout, is almost certainly going to be the test case. The cities, which can declare bankruptcy, will dump their obligations onto the State (the Constitution of which demands fulfillment). The State, which cannot fulfill them either, will attempt to dump them onto the Federal government. Since socialism is about the equal sharing of misery, we’d better hope the GOP hangs onto Congress.

      • FriendlyGoat

        Glad you brought that up.

      • Skookum John

        These gold-plated pensions are an obscene affront to public policy and should be voided as fraudulent.

  • Andrew Allison

    All the more reason to be very, very wary of a PR bailout.

  • Anthony
  • Jim__L

    The terms?

    People who chose career over children are on their own.

  • slovokia

    “Moreover, the federal government, unlike states, can issue debt in its own currency (currently at record-low rates) and even print money to cover its obligations.”

    Let us not forget that the ability to print money does not equate to the ability to cover obligations in real terms (i.e. in terms of goods and services”. While a government may initially be able to pay for items with newly issued money, the prices of those items will eventually go up. All the government has done by printing money is to transfer wealth to itself from the pockets of private holders of money – that wealth is finite and exhaustible. In short printing money is just another form of taxation – with the same real limits set by the size of the overall real economy.

  • BernieFlatters

    I got into an exchange of comments on a news article regarding teacher pensions in. I was responding to a comment that was made that teacher pensions are in place of Social Security benefits (a common defense) and I made the point that teachers and other public employees in my state can retire with pensions that are multiple times higher than Social Security, which maxes at around 32k. That high level of pension benefit is one reason that the pension boards need constant infusions of new money. I would like to be more accurate in my comments by using specific examples of what particular people are getting upon retirement in my state, but I am not sure how to get that data. I suspect that the average teacher takes home benefits much higher than 32k.

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