Public Pension Problems

Tina Haapala |

The election is over. And while the various talk-show hosts still won’t shut up, it’s time to get started fixing America. This last fiscal year (October 1, 2011 through September 30, 2012), the United States collected $2.45 trillion in taxes. While that seems like a lot of money, the Fed’s expenditures were $3.52 trillion, which resulted in a $1.09 trillion deficit.
We had to borrow 31 cents for every dollar that the government spent. Over $1 trillion was added to the country’s debt. Let that sink in.
With that extra $1 trillion, the debt owed by the United States represented 74% of the entire U.S. economy. And that doesn’t include the debt one part of the government might owe another.
This is fixable. Divided equally, that’s over $50,000 per person: Every man, woman, and child. If we restricted that only to taxpayers, then it’s closer to $140,000 per person, according to figures from truly frightening website).
If that’s not scary enough, we still need to face something else: Public Pensions. Most state and municipal workers expect the pension benefits they were promised to be paid to them when they retire. They are counting on it as a major source of their retirement savings. And yet, of the 100 largest public pension plans tracked by Pensions & Investment, an international newspaper of money management, only three are projected to be saving enough to be able to fully fund their promises. In fact, the average funding ratio for those top 100 plans is right around 74%. That means there’s close to $800 billion of unfunded liabilities. The deficit total for all the plans out there is probably in the $2 trillion-plus range.
There’s a variety of reasons for this. One isthat it is a lot easier for politicians to promise benefits to employees than it is to raise or divert tax dollars to pay for them. Another is that people are living longer. Since a pension lasts for life, if retirees don’t die on time, it costs more. Lastly, the Federal Reserve isn’t helping. As anyone trying to live off of bonds and CDs will tell you, this interest rate environment, while great for borrowers, is murder on savers including pension plans.
For most plans, modest changes (or a few good market years) will bail them out. Others will not be able to dig themselves out of the hole they’re in without some substantial funds from their governmental bodies. But some municipalities can’t begin to dig, since they lack even a shovel. The prospect of bankruptcy looms if they can’t get a bailout from their state. Some predict the problem will get so bad that the Feds may have to dip their own buckets in and help with the bailing.
None of this is likely to cause too much of a problem in the next few years, but just as the Federal deficit began modestly, unfunded public pension liabilities can slowly grow into a monster that’s hard to control.
This article was published under the title "Learning the problems in public pension" in the Wichita Falls Times Record Newson December 9, 2012.