One of the unpleasant – and largely ignored – fiscal realities facing state and local government is unfunded pension liabilities. Think about it: so-called “defined benefit pension plans” under which the recipient receives a fixed pension upon retirement all must be funded. If you’re a government employee, that means the taxpayers will be contributing to your pension fund. The problem, however, is that governments don’t rigidly fund their plans as they should, thereby creating an unfunded obligation for a future payout. Scared yet? It’s all of us who’ll have to foot a future bill.
I’ve been plowing through some academic pieces on the state and local unfunded pension problem, but a recent article by Robert Novy-Marx and Joshua Rauh is about the most frightening. Here are some key panic points.
In 2008, states alone reported about $1 trillion in unfunded pension liabilities. However, the authors point out that their discount rate is totally bogus. Using more appropriate discount rates, they find that the lower bound for the UPL is $1.3 trillion while the upper bound is $3.2 trillion. The $3.2 trillion is, as they argue and I would agree, closer to reality.
But wait, there’s more. That was only the state pensions. Local pensions add up to another $1 trillion in UPL, bringing the grand total to $4.2 trillion.
But wait, there’s more. This only includes pensions and says nothing about state retiree health benefits. Their stated unfunded liabilities are around $0.3 trillion. Grossing it up three times in-line with their pension estimates and you get another $1 trillion in unfunded state retiree health benefits.
Now we have a grand-total of $5.2 trillion in unfunded state and local pension and retiree health care benefits. That’s about 5 times more than all currently-issued state general obligation bond debt (about $1 trillion). So if folks are worried about the scope of state GO debt, then they should be sh**** on themselves about the $5.2 trillion.
Throw in the current deficit, Medicare, Medicaid, Social Security and, heaven forbid, Obamacare . . . and the country is positively, absolutely, without a doubt BROKE! There is no way we can pay for one of these items, much less all of them.
Maybe we should stock up on gold. If gold is already booming because of what the feds are doing, wait till folks get a better understanding of these liabilities . . . gold has only begun its bull run.
As pointed out at the Heritage Foundation blog, UPLs are behind the Card Check push.
UPDATE 28 November (in response to a question about the accounting of retiree health care benefits):
Retiree health care liabilities fall under the Government Accounting Standards Board Ruling 45 (GASB 45) which was phased-in over several years starting in FY 2006. Most state governments and very large municipalities must now report their health care liabilities–though the estimate I used was only for state governments. Smaller local jurisdictions have been slowly coming under GASB 45 with full compliance supposedly by FY 2008.
However, I don’t know of a source that has yet attempted to compile all of this data and surely some jurisdictions are not yet in compliance.
Also, the study cited only looks at pensions for the largest 116 state pension plans–there are many, many more smaller state pension funds which could add up. The healthcare retiree number is only a guestestimate that I threw out there because the issue is only now coming on the radar screen.
And, for the most part, healthcare retiree benefits are almost completely unfunded–meaning there is no pool of assets to help offset the future costs.