Most government pension plans are underfunded. They are also making unrealistic assumptions about future rates of return. This is indeed a recipe for disaster. From Robert Fellner at mises.org:
The combined debt held by U.S. public pension plans will top $1.7 trillion next year, according to a just-released report from Moody’s Investors Services.
This “pension tsunami” has already forced towns like Stockton, California and Detroit, Michigan into bankruptcy. Perhaps no government mismanaged their pension as badly as Puerto Rico, where a $43 billion pension debt forced the commonwealth to seek protection from the federal government after having defaulted on its obligations to bondholders — a default which is expected to spread to retirees in the form of benefit cuts.
While the disastrous outcome of Puerto Rico’s pension plan — which is projected to completely run out of assets by 2019 — represents the worst-case scenario, the same series of events that led to its demise can be found in most public pension plans nationwide.
There are three primary culprits that can be found in nearly every state suffering from a public pension crisis:
1. The use of accounting gimmicks that are designed to shift costs onto future generations — an approach outlawed for private pension plans and rejected by both public and private plans in Canada and Europe.
2. Lawmakers, acting in their political self-interest, who have catered to the past demands of government unions to enrich their members’ benefits while passing the costs onto future generations.
3.A broken governance structure where public pension board members are actually penalized in tangible ways for acting responsibly, and are rewarded by choosing to delay the day of reckoning.
Perhaps the most concise assessment of public pensions came from the former chief actuary for the nation’s largest public pension fund — CalPERS — who noted simply that: “Politics and pensions just don’t mix.”
And it’s not just “liberal” states like California who have succumbed to the siren call of public pensions. My home state of Nevada — historically thought to be a bastion of limited government thought — is in a proportionally deeper hole than our California neighbors!
The Trouble in Nevada
While most financial experts are warning of future teacher shortages, decaying roads, higher taxes and cuts to public safety, the Public Employees’ Retirement System of Nevada (PERS) is confident they can avoid all that by doing one simple thing: produce investment returns higher than what even Warren Buffett expects to get!
Because PERS has failed to hit its investment targets over the past 5-, 10-, 15-, 20- and 25-year periods, government workers’ retirement costs have soared to today’s record-high 28 percent of pay (40.5 percent for police and fire officers) — which now consumes more than 12 percent of all Nevada state and local government tax revenue combined.
And as more money is sent to PERS, less is available for salaries, like the only $34,684 offered to new Clark County school teachers last year — almost certainly a driving factor behind the district’s perennial teacher shortages.
What’s worse, over 40 percent of what all government workers — excluding police and fire officers — pay towards PERS is spent on the system’s previously accrued debt, rather than on financing the employee’s future benefits.
To continue reading: Government Pension Plans Are Headed for Disaster
