PUBLIC PENSION DEFICITS ARE WORSE THAN YOU THINK
March 23, 2010
Pension plans for state government employees report they are underfunded by $450 billion, but Andrew Biggs, resident scholar at the American Enterprise Institute (AEI), estimates the shortfall is closer to $3 trillion.
The problem is fundamental: According to accounting rules adopted by the states, a public sector pension plan may call itself "fully funded" even if there is a better-than-even chance it will be unable to meet its obligations. When that happens, the taxpayer is on the hook, says Biggs.
- Consider New York state's Employees Retirement System (ERS), which assumes an 8 percent return on assets.
- Discounted at this interest rate (8 percent), ERS's liabilities had a present value of $141 billion in 2008.
- ERS assets at that time were $152 billion, making the program overfunded by 7 percent.
- But New York's portfolio is hardly likely to produce a steady 8 percent each year -- since 1990 returns have ranged from 30.4 percent in 1998 to -26.4 percent in 2009.
A computer simulation incorporating fluctuating asset returns shows that New York's ERS has only around a 45 percent probability of meeting its liabilities.
In a recent AEI working paper, Biggs shows:
- The typical state employee public pension plan has only a 16 percent chance of solvency.
- In fact, more public pensions have a zero probability of solvency than have a probability in excess of 50 percent.
When public pension assets fall short, taxpayers are legally obligated to make up the difference -- a contingent liability exceeding $3 trillion. Public pension plans are hiding behind unrealistically low deficit figures, allowing policymakers to dodge difficult choices today at the cost of future taxpayers, says Biggs.
Source: Andrew G. Biggs, "Public Pension Deficits Are Worse Than You Think," Wall Street Journal, March 22, 2010.
For working paper:
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