Blue Model Blues
The Pension Storm Cometh

Last April, we highlighted research from Joshua Rauh, a professor at Stanford’s Graduate School of Business, placing America’s state and local pension shortfall at an eye-popping $3.4 trillion. This year, Rauh has crunched the numbers again—and, despite a growing stock market, the situation has not improved. The Financial Times reports:

US cities and states face a “looming crisis” after the collective funding hole in the public pension system jumped by $434bn in just one year, raising fears of further Detroit-style bankruptcies.

According to academic research shared exclusively with FTfm, US public pension funds lack $3.85tn that they need to pay the retirement benefits of current and retired workers. […]

Big pension deficits have already contributed to the bankruptcy of several US cities, including Detroit. Puerto Rico, the US territory, this month declared a form of bankruptcy after amassing debt and pension obligations of $123bn.

The numbers are so grim that it is hard to see how America gets through the next recession and its aftermath without a wave of municipal bankruptcies. Public employee unions have managed to extract promises from state and local governments that are simply impossible to keep. And those governments have been papering over the extent of their obligations with accounting assumptions that are so overly-optimistic as to be deceptive.

Before the bankruptcies, however, there will be pain. School budgets will be cut, civil servant salaries will stagnate, welfare services will atrophy, new fines will be imposed, and infrastructure will be neglected as state legislatures and city councils try to make room in their budget for ballooning pension contributions.

If the governing class had shown more backbone, accounted for pensions more responsibly, imposed reasonable restrictions on union power, and distributed cutbacks more gradually, the situation might not be as dire as it is today. But now the pension vise is tightening fast, and it looks like decades of elite shortsightedness will come at a great cost, especially for the most vulnerable Americans.

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