What will the public pension, health gap be now? $3 trillion? $5 trillion?
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By FRANK KEEGAN – This time last year they said the gap for public employee pension and retirement health care promises was $1 trillion. What will it be when the Pew Center on the States releases its updated study next week: $3 trillion? $5 trillion?
The true size of this catastrophe will not be known for a decade — too late to do anything about it.
That is why getting a better grip on how bad it really is makes sense for America.
Pew’s Trillion Dollar Gap study helped draw national attention to the crisis and drew fire from those who said it was overstating the problem. Others said it did not go far enough because it was based on official assumptions already disproved and did not include data from the recession.
Those data are included this year, even though the disproved assumptions remain the same.
One group anticipating dire news from Pew is the National Association of State Retirement Administrators, which, along with the National Council on Teacher Retirement, issued a report Thursday: Strong Investment Gains and Legislative Changes Speeding Public Pension Recovery.
They report good news. As of December, “… state and local government retirement system assets totaled $2.93 trillion, a 35 percent increase from their quarterly low point during the market collapse.”
Wonderful. Except according to pension fund administrators’ own promises to workers and taxpayers, assets should be above $4 trillion. That leaves taxpayers holding a leaky $1.1 trillion bag.
Expecting the new Pew report using 2008-09 numbers to show full impact of the recession, NASRA points out that “These asset levels are also nearly 25 percent higher than they were on June 30, 2009 — a date on which many recent studies on the financial condition of state and local pension trusts are based.”
Keith Brainard, NASRA research director, said Thursday that “over longer periods — over 20 to 25 years — the percent (return) is relatively high.”
Pension officials estimate a rate of return — called the discount rate — to determine how much money governments must set aside now to eventually pay locked-in retirement benefits. The higher the assumed rate of return — public pensions assume about 8 percent — the less money they have to set aside.
Politicians love a high discount rate. Then they can push problems off until they have fled, pocketing their own guaranteed pensions and leaving somebody else to pay.
The NASRA report includes charts that show funds in 2010 recovering to above levels of 2005, but that still is more than a trillion dollars below where they promised to be.
And because government pension benefits are guaranteed by state constitutions and statutes that have yet to be challenged in court and ruled on by judges covered by those pension systems, retired state and local workers get their checks whether any money is available to cover them or not. They have first claim on taxpayers’ money and property.
Another NASRA chart shows a 25-year average return of 8.8 percent. But starting with the 2003 value in the report, they would have to earn at least 10 percent every year just to average their 8 percent promise by 2027. And in between somebody has to come up with an extra $18.5 trillion to cover pension checks.
It’s simple. According to NASRA, funds lost more than 27 percent from peak to trough in one year. That means at a promised gain of 8 percent, they must earn 60 percent the next year just to stay even. They earned only about 15 percent.
Even the 35 percent and 25 percent gains they reported Thursday fall far short of what they promised to pay pension benefits workers already earned.
Economist Andrew Biggs of the American Enterprise Institute confirms that “pension assets today are still over $1 trillion less than was projected three years ago, or 27 percent short. So plan assets are recovering, but they’d need to significantly increase contributions or earn very high returns over the next 10 years or so if they want to catch up to where they were before.”
Biggs has said that increasing risk, as pension funds are doing to catch up, does not reduce the liability, and another market crash will make a bad situation even worse.
Because pension fund managers assume there never will be another market downturn, Biggs claims they should use a lower discount rate that would represent more realistic risk. Calculating on that basis, he puts the real current liability for promised pension benefits at $3 trillion.
Northwestern University professor Joshua Rauh says the true situation is even worse, and some pension plans will begin running out of money in a few years.
The NASRA report points out, “In the past few years, nearly two-thirds of states have made changes to pension benefit levels, contribution rate structures, or both to improve the long-term sustainability of their retirement plans."
According to the National Conference of State Legislatures, known as NCSL, more than 20 states — an "unprecedented" number — made such changes in 2010. Many local governments have made similar fixes to their plans, and other state and local governments are expected to consider similar modifications in 2011.
But those changes have little or no impact on benefits public workers already have earned. Those are the promises that are trillions of dollars in breach.
And worst of all, the NASRA report deals only with pensions. The Pew Trillion Dollar Gap study included rough estimates for breach of promise on retiree health care benefits.
The estimates are rough because nobody knows how high the cost will go — only that governments have invested virtually no money to pay and refuse to put the debt on their books.
According to the latest Government Accountability Office study using 2008 data, the bill “exceeds $530 billion … However totaling … unfunded liabilities … is challenging for a number of reasons, including the way that governments disclose such data.”
Pew had to add updated health-care numbers — if available — to the Gap study coming out Tuesday.
How much more than $1 trillion will it be this year? $3 trillion? $5 trillion?
How many homes and businesses will states confiscate to fill it?
Frank Keegan is a national editor for The Franklin Center for Government and Public Integrity, watchdog.org and statehousenewsonline.com . Any disgusted public employee, journalist, activist organization or citizen watchdog who wants help exposing government waste, fraud and abuse may contact him at: frank.keegan@franklincenterhq.org
For a comprehensive primer on state and municipal government pensions, check sunshinereview.org .
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Tags: Accountability, Biggs, Brainard, catastrophe, crisis, dollar, employee, Frank, gap, Government, Keegan, Kellogg, municipal, NASRA, Office, Pension, Pew, public, Rauh, state, teacher, trillion
1:43 pm on April 22nd, 2011
Quoting …”And because government pension benefits are guaranteed by state constitutions and statutes that have yet to be challenged in court and ruled on by judges covered by those pension systems, retired state and local workers get their checks whether any money is available to cover them or not. They have first claim on taxpayers’ money and property.”
That last sentence will be true ONLY when they erect pay-as-you-leave turnstiles at the State borders. Thankfully there are still quite a number of States with very modest debt and little in the way of unfunded pension/healthcare promises. I suspect the populations of these States will grow rapidly as Citizens (of the Problem States) WITH the ability to Pay move away.
Greed has consequences … I see Plan failures on the horizon.
6:02 am on November 24th, 2011
Thank you for your view on this. You should come and help answer questions on thepension.org.