Many have seen the National Debt Clock. However, this is only U.S. Treasury debt – which doesn’t include agency debt, unfunded liabilities of Social Security and Medicare, State and Local debt, some student education loans (those not included in the Treasury debt), and for the main theme for this post unfunded State and Local pensions.
From this point forward, I’ll use the single work “pension” to mean public State and Local pensions that are defined benefits where the monthly retiree’s retirement benefit is fixed and known. The unfunded liabilities of these pensions are the promised benefits that are not currently covered by the plan’s assets, and in most cases the liabilities are the responsibility of the government employer and taxpayers.
A number of factors are leading to the unfunded public pension issue. One is that returns assumed in the actuarial calculations tend to be higher than current returns are providing. This returns gap leads to the pension paying out more than it can sustain long term. Public pensions are then taking on more risk assuming that will make up for lower returns. However, volatility takes away what returns might give. Thus, the plan’s assets are not getting the necessary returns needed. What has then happened, even with markets having made gains since 2009, plan assets have not because, 1) they were underfunded to begin with and didn’t have enough capital in the markets to get those gains and support current retiree expenditures, 2) plan allocations changed to include other assets that have not experienced gains.
Plan design, decisions and assumptions, management practices and plan design formulas, double dipping, purchasing additional years for less than the plan could sustain known as “air time,” and other practices not fully pricing the benefit promised have lead to the looming and ever growing problem.
The organization, The Retirement Security Initiative, is an organization seeking to solve the issues that taxpayers would soon face if pensions are left as they are. You can get an idea of the magnitude of the problem in your State at View Your State’s Unfunded Liabilities.
PS. I’ve written in the past about the other problem of unfunded liabilities of corporate pensions.