Good News: Pension Crisis Far Worse than Imagined
The state pension crisis that's been known about for years is probably far worse than the states let on. The unfunded liabilities of state pension funds may be as much as $4.1 trillion, if you use a more realistic rate of return on investment.
The new report, from State Budget Solutions assumes a modest 3.2% return rather than the 7% or more that most states use to calculate their liabilities.
America’s pension crisis may be much worse than we thought. A new report from State Budget Solutions looks at each state’s pension liabilities using a lower estimate of the rate of return than the states use themselves, and found that the country’s plans are underfunded by $4.1 trillion, and only 39 percent funded overall. The state-by-state breakdown looks even worse, with Illinois, Connecticut, Kentucky and Kansas holding plans that are less than 30 percent funded, and another 27 states below 40 percent. Other states have it bad as well: Reuters notes that in five states, pension liabilities more than 40 percent as large as the state’s economy as a whole, and in Ohio and New Mexico, they’re more than half as large. Considering that many people consider plans to be “safe” only when their funded level is over 80 percent, this is troubling news indeed.
These numbers are significantly higher than those we’ve seen before, which is due to the extremely conservative estimates of the rate of return. Rather than assuming a rate of return in the 7-9 percent range, as most plans do, State Budget Solutions is using the “risk free” rate of 3.225 percent, which is tied to the yield on treasury.
The state of Illinois was hit by an SEC suit because they tried to hide the underfunding of their pension system from investors:
An SEC investigation revealed that Illinois failed to inform investors about the impact of problems with its pension funding schedule as the state offered and sold more than $2.2 billion worth of municipal bonds from 2005 to early 2009. Illinois failed to disclose that its statutory plan significantly underfunded the state’s pension obligations and increased the risk to its overall financial condition. The state also misled investors about the effect of changes to its statutory plan.
A special panel charged with reforming the pension system in Illinois may be nearing an agreement, although they've been close before and failed in the end. The only way the panel is working at all is because Governor Pat Quinn withheld pay from state legislators unless they took pension reform seriously.
Illinois may be the worst of the worst, but a couple of dozen other states are in serious trouble with funding their pensions. Their optimistic estimates about rates of return is making the problem appear manageable, when in fact, the danger of default is only as far away as the next economic downturn.
The usual suspects on the left claim there is no pension crisis, that it's manufactured by right wingers to deny the noble public worker his just deserts following a career of service and sacrifice.
Which, of course, is why a Democratic governor cut off the pay of Democratic legislators in Illinois because the non-pension crisis that really only exists in our paranoid heads isn't really important.
Glad we got that cleared up.
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