Public Pensions: An Economic Time Bomb
Who cares about public pension liability? Well, you should – after all, it’s the reason entire cities and even states are facing bankruptcy. Joshua Rauh, professor of finance at Stanford and Senior Fellow at the Hoover Institution, paints a startling picture of just how broken the public pension system really is, and what will happen if we continue to ignore it.
Major American companies have taken steps to phase out pensions because _________________________________________.
the taxes on them have become too complicatedolder employees want other types of benefits insteadthey are too expensiveEuropean companies have mostly phased them out alreadyHow many retired public employees are receiving pensions of over 100,000 dollars per year in California?
32,00042,00052,00062,000A retired New York City sanitation worker is getting $35,000 per year in pension payouts.
TrueFalseHow much in unfunded liabilities do State and local governments across the U.S. openly admit to?
1.4 trillion dollars, or 11,000 dollars per household2.4 trillion dollars, or 21,000 dollars per household3.4 trillion dollars, or 31,000 dollars per household4.4 trillion dollars, or 41,000 dollars per householdWe can turn the odds of state and local governments going into bankruptcy due to public pension liabilities with ___________________________________.
public pressuredisciplinecommon senseall of the above
- Public pensions are increasingly consuming city and state budgets, syphoning taxpayer dollars from key services and preventing tax cuts.
The private sector has largely phased out pensions because they have become too expensive. However, pensions still live on in the public sector—among government employees—and they’re increasingly consuming city and states’ budgets, hindering potential tax cuts or better services.
View sourceIn California, more than 62,000 retired public employees are receiving pensions of over $100,000 per year. The result, as Hoover Institutions’ Joshua Rauh explains, is a growing burden on taxpayers: “The gap between what public pension funds in California have saved up for public employee pensions and the value of what is owed to public employees is $769 billion, or more than $60,000 per California household. It is as though each household is carrying around a credit card balance of $60,000 that is growing each year.”
View source- State and local governments across the U.S. admit to $1.4 trillion of unfunded pension liabilities—the real number is over $4 trillion.
State and local governments across the U.S. openly admit to $1.4 trillion of unfunded pension liabilities, or $11,000 per household. “Unfunded” means money that has been promised but is not actually in the bank. As high as that is, the real number is actually around $4 trillion, or $32,000 per household, according to the Federal Reserve.
View sourcePensions have already forced some cities into bankruptcy, including California’s San Bernardino and Vallejo, while the entire state of Illinois has been facing economic crisis for years largely as a result of unfunded liabilities.
View sourceRelated reading: “Hidden Debt, Hidden Deficits” – Joshua Rauh, Hoover Institution
View source- Public pensions are a corrupt cycle of public-sector unions giving donations to candidates who then direct more money to government workers.
The public sector pension system is a self-perpetuating cycle: Public-sector unions give large donations to candidates, who are then responsible for negotiating how much taxpayer money goes to public sector workers—promising high salaries in the short-term and hiding the payments that will be due down the road.
View sourcePoliticians use a time-tested political strategy: They lie by saying they can pay for more generous pensions not by collecting more taxes, but by making investments at a “guaranteed” 7.5% return, despite the increasingly low likelihood of that promised return.
View source- Because of public pensions, many cities are effectively paying for multiple public departments at the same time.
While public employees do vital work for our local communities and society as a whole, and thus deserve competitive pay and retirement benefits, many cities are effectively paying for multiple public departments at the same time because of unsustainable pensions.
View sourceRelated reading: “Burden of Public Pension Promises on State and Local Budgets” – Daniel Bergstresser and Joshua Rauh
View source- State and local governments must report unfunded liabilities honestly and phase out guaranteed pension programs for 401k plans.
To address the public pensions crisis, state and local governments must report unfunded liabilities honestly, presenting realistic 2-3% yields so voters can see how much money pension programs are actually costing taxpayers. Governments must phase out guaranteed pension programs as quickly as possible, replacing them with 401K plans, which have the additional advantage of being portable.
View sourceRelated reading: “Policy Options for State Pension Systems and Their Impact on Plan Liabilities” – Joshua Rauh, Robert Novy-Marx
View source
I want to talk to you about three words that should scare the heck out of you, especially if you’re young: public pension liabilities.
Okay, I know you probably have about a hundred things you’re worried about, and public pension liabilities likely aren’t one of them.
But that’s the reason this is so scary—because almost no one is paying attention.
Unless you’re okay with your city going full Detroit and giving more of your hard-earned money to pay off someone else’s debts, stay with me.
So what is a public pension liability?
A pension is a guaranteed, lifetime payment to someone after they retire. Pensions used to be a big deal in the private sector. Every major American company had them. But they became too expensive, and companies have taken steps to phase them out.
However, pensions still live on in the public sector—among employees of the government—and they’re eating city and states’ budgets alive. More and more money that could go to tax cuts or better services is instead being shoveled aside to pay for these benefits.
Why is this happening? Over decades, politicians have promised trillions of dollars in pensions to government workers. That includes police, firefighters, teachers, and city and state officials. You name a government job, and there’s a pension associated with it.
Now, you may be wondering, “How big are these payments?” Many pensions are quite large. In California, more than 62,000 retired public employees are receiving pensions of over $100,000 per year. Sometimes, it’s even crazier. A retired New York City sanitation worker is getting $285,000 per year. A retired county administrator in California receives over $400,000 per year.
Remember, these are guaranteed lifetime yearly payouts.
Now, we love our public employees. They do vital work for our local communities and the wider society. They deserve competitive pay and retirement benefits. But currently, many cities are, in effect, paying for multiple public departments at the same time: the department that’s working now and, because people are living longer, a generation or two of retirees.
The system amounts to a self-perpetuating, corrupt merry-go-round. Public-sector unions give large donations to candidates, who are then responsible for negotiating how much of your money goes to public sector workers. These arrangements not only promise high salaries in the short-term, but they also hide the payments that will be due down the road when it will be much too late.
The results are predictable.
State and local governments across the U.S. openly admit to 1.4 trillion dollars of unfunded pension liabilities, or $11,000 per household. “Unfunded” means dollars that have been promised, but there’s no actual money in the bank. And that’s just the amount they admit to. The real number, according to the Federal Reserve, is much larger—around 4 trillion dollars, or $32,000 per household.
Pensions have already thrown California cities like San Bernardino and Vallejo into bankruptcy. And the entire state of Illinois is teetering on the edge.
So how do politicians get away with this? They use a time-tested political strategy: they lie.
They lie by saying they can pay for more and more generous pensions—not by collecting more taxes, but by making investments at a “guaranteed” 7.5% return.
But this is nonsense. It’s less and less likely they’ll meet their 7.5% goal over time, and their investment behavior—pouring ever more funds into ever riskier investments—suggests they know it. But if they were to use a more realistic assessment, they’d need to raise taxes dramatically. And they love their jobs too much for that.
We can, however, turn the odds in our favor—with public pressure, discipline, and common sense. Here’s what needs to happen:
First, we need state and local governments to report unfunded liabilities honestly: the real numbers—using the 2-3% yields that sound financial reporting would require. No more pie-in-the-sky stuff. The truth should shock voters into demanding action.
Second, we must phase out the guaranteed pension programs as quickly as possible and introduce 401K plans. 401K plans, if designed properly, can provide excellent and sustainable retirement benefits. These plans also have the advantage of being portable. If you leave the public sector and go work in the private sector, you get to take your money with you. In other words, you don’t have to be locked-in to a lifetime government job to receive retirement benefits. Win-win.
Let’s end the current structure of public sector pensions and move to a sustainable way of compensating our public workforce.
Save your city. Save your state. Save your money.
I’m Joshua Rauh, professor of finance at Stanford and Senior Fellow at the Hoover Institution, for Prager University.
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