With everything else going on — the election, the Chicago teachers’ strike, the upheaval and assaults in the Middle East — it’s worth keeping in mind the single biggest financial timebomb here in the US: underfunded pension obligations. This is, in my opinion, a more serious crisis than the massive unfunded Federal entitlement obligations for two reasons. First, unlike the Federal government, states (and cities) can’t print more money. Second, as states (and cities) reform, cut back on, or even abandon pension payments, the Federal government will likely become the last resort for those receiving such payments, putting an even greater burden on the out-of-control Federal deficit.
Steve Malanga of the Manhattan Institute has yet another sobering look at the pension crisis over at Real Clear Markets. It’s worth reading the whole thing, but here’s a sample:
The latest poor investment returns likely make those numbers considerably worse. Over the summer, our biggest public retirement funds reported meager returns, including the largest fund, the California Public Employees’ Retirement System (CalPERS), which clocked in at a mere 1 percent gain for the year ended June 30. The average among all public pension funds was 1.1 percent, compared to anticipated returns of between 7.5 percent and 8 percent. With funds already paying out more than $200 billion a year in benefits and 14.5 million government workers accruing new retirement credits, the cost of fixing government pension systems amid such scanty returns gets steeper every day.
One strategy of states and cities has been to make changes that apply only to new employees, and then proclaim big savings that don’t actually occur for years. The California bill, passed on the last day of August after unions’ legislative allies watered it down, largely impacts workers hired on Jan. 1, 2013 and after. By some estimates the bill would save about $50 billion over 30 years in a state where unfunded liabilities are estimated between $250 billion and $500 billion.
That pretty much sums up the core problems: unrealistic estimates for return on investment combined with “reforms” that barely dent the unfunded pension obligations, which are estimated to be on the order of $5 trillion. That’s a figure that the Federal Goverment has shown itself unable to get a handle on; now imagine states and cities trying to do so. Out in California, we’re already beginning to see cities declare bankruptcy, largely due to pension obligations. States, in theory, don’t have that legal option — but I suspect we’re going to find out what de facto state bankruptcy looks like inside of four years; the only question is whether California or Illinois will be the first to take the plunge. ..bruce w..