Throughout the last decade or more, Social Security has been increasingly discussed as a huge “time bomb” in our society’s fiscal and retirement planning. Now, however, a tsunami of equal magnitude may be arising in state public pension funds. How did this happen?
UNFUNDED PROMISES
The pension payouts that state employees get when they
retire are not investments, they are promises.
Basically, state legislatures decided to promise a certain percentage of
return (varies from state to state) without having an actual strategy on how to
get the money. Public pension funds
invest in stocks and bonds, but they usually return much less than the seven to
ten percent that state legislators promise.
Over the past several decades, these funds were increasingly supplied
with taxpayer dollars. Now, state
governments employ so many people and money is so hard to come by (a la
recession) that funding shortages have started.
“Public pension
promises are huge and, in many cases, funding is woefully inadequate.” From
a 2008 Letter to shareholders by Warren Buffet.
A TRILLION DOLLAR PROBLEM
A Bloomberg
article recently pointed out that public pension funds (from state and
local governments) could cause the federal government to pass another $1
trillion bailout. The article added that
retirement fund administrators are writing up the amount of pension funding
that is actually available. Most
estimates have the nation’s public pensions with about $2 trillion in assets
and $2.9 trillion in liabilities, however the asset valuation could be bloated
while the liability estimates could be low.
As an example, some claims have a $500
billion shortfall in California’s pension system alone.
Therefore, the scale of the problem could actually be larger
than the $1 trillion estimated.
Unfortunately, there appears to be other problems related to the size of
these funds. The biggest of these
problems are unnecessary waste. Waste,
in this case, is defined as paying people six figure pensions when they retire
at ages 45, 50, etc. These people are
still alive and collecting massive pensions when the next generation
retires. The growing group of retirees
and the shrinking group of the workforce is increasing the pressure on the
workforce to fund the public pensions through their tax dollars.
WASTE, WASTE, EVERYWHERE
Examples of outrageous public pension plans:
BONDS ARE NOT A SOLUTION
Some states are turning to bond sales to fund pensions,
however, this causes a new long-term problem.
As we have learned from debt management, heavy bond borrowing leads to
high interest payments. If states borrow
money only to spend it immediately in funding their pension plans, the
taxpayers will be left to pay back the entire bond issuance plus the interest
rate. The taxpayers are actually better
off paying off the shortfall (through a one-time tax increase) up front.
COMMON SENSE IS THE SOLUTION
States need to stop promising rosy retirements. The state needs to fund pensions as part of
the benefits package of hiring individual state employees. State employees should be required to make
their own contributions to their retirement.
Then, a minimum age (between 62 and 67) needs to be set to collect on
retirement accounts.
Whatever the market returns is what your retirement fund ends
up being, not what some state legislator promises 20, 30, or 40 years down the
road. If you eliminate the promises, you
eliminate the short-funded possibilities.
When the fund shrinks, people get less.
When the fund grows, people get more.
If state employees don’t like it, they are more than welcome to start
their own 401k or IRA in order to offset the state’s problems. This is what the rest of the real world does.
