Dec

26

From a Mercatus study on pensions:

Pension plans operated by state governments on behalf of their employees are underfunded by an estimated $452 billion according to official reports, with total liabilities of $2.8 trillion and total assets of $2.3 trillion in 2008. However, many economists argue that even these daunting liabilities are understated. Current public sector accounting methods allow plans to assume they can earn high investment returns without any risk. Using methods that are required for private sector pensions, which value pension liabilities according to likelihood of payment rather than the return expected on pension assets, total liabilities amount to $5.2 trillion and the unfunded liability rises to $3 trillion. The ability of governments to pay for the retirement benefits promised to public sector workers runs up against the reality of limited resources.

In this study, we consider the case of New Jersey, which operates five defined benefit pension plans for state employees. The New Jersey Senate unanimously passed legislation in February 2010 that would put a question on the November ballot to constitutionally require the state to begin to make its full annual payment to the state's pension system. The bill requires the state to catch up to paying its full obligation by FY 2018. From that year forward the state will be constitutionally required to make the full payment to its pension systems each year as calculated by plan actuaries. The state reports that its pension systems are underfunded by $44.7 billion, when liabilities are discounted at the 8.25 percent annual return that New Jersey predicts it can achieve on funds' investment portfolios.

However, when plan liabilities are calculated in a manner consistent with private sector accounting requirements, methods that economists almost universally agree are more appropriate, New Jersey's unfunded benefit obligation rises to $173.9 billion. This amount is equivalent to 44 percent of the state's current GDP8 and 328 percent of its current explicit government debt. This calculation applies a discount rate of 3.5 percent (the yield on Treasury bonds with a maturity of 15 years) to reflect the nearly risk-free nature of accrued benefits for workers. It is estimated if state pension assets average a return of 8 percent, New Jersey will run out of funds to meet its pension obligations in 2019. If asset returns are lower than 8 percent, they will run out of funds sooner. State actuaries estimate that under certain assumptions, New Jersey's pension plans will run out of assets to make benefit payments beginning in 2013.

Scott Brooks comments:

So basically, all that needs to happen for pensions to be fully funded is to pass legislation to require that they be fully funded. Now, all the states have to do is pass legislation that allows them to print money and they could make all their problems go away over night!

If one were to squint one's eyes and put on a "fact blind-fold", you can see that there is no problem with pensions. This is obviously alarmist claptrap.

I seem to remember bringing up the underfunded pension problem on this list over the last several years and getting "poo-poo'ed" for being a bearish chicken little.

Nothing to see here, move along, move along.


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