CNBC had an article the other day highlighting the disturbing public pension gap that is growing at an alarming rate. While I didn’t read the study by Moody’s behind the article the statistics highlighted by CNBC are, to say the least, frightening:
In less than a decade, that shortfall has tripled to at least $2 trillion—more than half of all outstanding state and local bond debt, according to a report by Moody’s Investors Service.
Moody’s looked at the unfunded liabilities of the 25 biggest public retirement systems, which cover 40 percent of the $5.3 trillion in total U.S. public pension plan assets.
Like nearly all retirement savers, pension funds got clobbered by the 2008 financial collapse. In the 2008 and 2009 fiscal years, the 25 plans’ assets dropped nearly 22 percent cumulatively on average, Moody’s said.
But the pension shortfall had been building well before the downturn—and has been made worse by state and local government’s shortchanging annual fund contributions. New Jersey, for example, took “contribution holidays” during the Great Recession and more recently has cut payments or just skipped them altogether, Moody’s said.
States and cities have also used accounting gimmicks to mask the widening shortfall, including “asset-smoothing” that lets them spread out the impact of the market downturn. They’ve also used rosy scenarios to inflate their estimated investment returns. Unlike corporate accounting rules, the rules for government accounting let pension fund managers just pick a return number that makes their future liabilities look smaller.
What? Contribution holidays?Accounting gimmicks? Holy shit.
Pension funds are also getting hammered by demographic forces that show no signs of easing. Widespread state and local job cuts since the Great Recession have shrunk the pool of active workers paying into pension fund savings—even as the pool of current retirees drawing benefits is living longer.
In Michigan, for example, the ratio of active employees to retirees has fallen by more than 50 percent. That state now has slightly more than one active employee for each retiree. Moody’s said
Why aren’t people going nuts?! When these things start inevitably blowing up who is going to have to pay into it? Easy – everyone else! It isn’t like a State is going to let the Teacher’s pension crumble without injecting it with a ton of cash. Similarly, you think the Federal government is going to just turn a blind eye when CALPERS goes defunct? No way!
It is Time to End Public Pensions
There were promises made in the past, I get it, honor those promises. Why, however, are new promises being made daily?
