Puerto Rico, America’s own little Caribbean paradise, is broke. But plenty of the fifty states aren’t far behind. Excerpt:
The study by Hoover Institution Senior Fellow Joshua Rauh, “Hidden Debt, Hidden Deficits,” is an update of a report issued last year. It should sound an alarm across the U.S. about the growing crisis of underfunded pensions at the state and local level. Instead, sadly, it will likely be ignored.
To put it bluntly, America’s pension systems are being mismanaged, which is hitting state and local budgets hard.
The Hoover study looked at 649 pension systems as of 2015. What it found was alarming. The average investment return for pensions was 2.87% for the year, while the discount rate — essentially, the expected investment return — was 7.36%. That means returns are 61% below expectations, a dismal performance to say the least.
This means that pension systems across the U.S. will have to do one of two things: Find more money to fund the expected payouts, or slash pension spending on future retirees — or some combination of the two. None of the choices is appealing.
Meanwhile these pension gaps pose a major threat to state and local fiscal health.
“While state and local governments across the U.S. largely claimed they ran balanced budgets, in fact, they ran deficits though their pension systems of $167 billion,” Rauh noted. “This deficit equals 18.2% of all state and local government tax revenue. … The deficits are large and the study reveals the fact that state and local government budgets are far from balanced when one considers pension promises.”
Here is the real money (hah!) quote, from this report:
State public pension plans are now underfunded by nearly $5.6 trillion – an increase of almost $900 billion from State Budget Solutions’ (SBS) last comprehensive report in 2014. When state pension funds are examined through the lens of a more realistic valuation, pension funding gaps are revealed to be much larger than reported in official state financial documents. This report totals state-administered plans’ assets and liabilities and finds nationwide total unfunded liabilities to be $5.59 trillion. The nationwide funding level is a mere 35 percent, which is one percentage point lower than two years ago. Combined across all states, the price tag for unfunded pension liabilities is now $17,427 for every man, woman and child in the United States.
Now, keep this in mind: These pensions are paid with taxpayer dollars, paid to government employees who enjoy defined-benefit pensions and retained benefits far, far in excess of what almost anyone in the in the private sector can hope for today.
We are in a situation in this country where the ever-decreasing percentage of the productive are paying for ever-increasing coin and benefits for the unproductive. Granted, the government has to employ a certain number of people – but is there any reason that city, state and Imperial employees should enjoy such generous benefits when their employers make do with 401ks?
There is a principle in economics called Stein’s Law, postulated by economist Herb Stein: “If something cannot go on forever, it will stop.” The current state of government employee pensions can’t go on forever. It will stop.
Question is, how far in debt will it drag us before it does?