Just how badly are public pensions underfunded? Here’s a great way to extract an answer:
A good response occurred to me, to those cited by Josh who want to argue that underfunding is a mere $1 trillion. OK, let’s issue the extra $1 trillion of Federal debt. Put it in with the pension assets. Now, convert the pensions entirely to defined-contribution. Give the employees and pensioners their money now, in IRA or 401(k) form. If indeed the pensions are “funded,” then the pensioners are just as well off as if they had the existing pensions. (This might even be a tricky way for states to legally cut the value of their pension promises)
I suspect the other side would not take this deal. Well, tell us how much money you think the pension promises really are worth — how much money we have to give pensioners today, to invest just as the pension plans would, to make them whole. Hmm, I think we’ll end up a lot closer to Josh’s numbers.
Do read the whole thing.
Great post, WC.
People covered by defined- benefit pension plans, including leftist college professors and other leftists (e.g. Dickie Trumka) might think about promoting polices that support, not dissolve, economic freedom. The idea that everybody sits on their miserable backsides watching other people feed and clothe them is not a road to wealth.
Using a low discount rate, the present value of social “security” pensions and Medicare “benefits” are worth millions of funny money dollars. Savers are robbed daily of big money, as the Fed pursues its effort to enrich people long in real estate and the Iron Workers.
So if you are a University president, and are pushing your investment managers to assume more risk to achieve the same levels of earnings growth seen during the Reagan administration, how come you are a socialist?
The pesky question is that rate of return into your computer to generate the pretty graphs in your Power Point presentation.
Thinking about slow growth, think about what the Saracens and the Visigoths did to Rome, destroying a few aqueducts along with their pillaging. Or, think of generations of ancient Egyptians conscripted to build for their rulers mausoleums similar to the football stadiums we build today as monuments to the god of urban renewal. Things can go into reverse fast, especially when the vandals are banging down the gate.
“Promises to pay people trillions in the far off future are a different thing than rolling over marketable debt every year. If it looks likely we won’t be able to pay pensions in 20 years, there’s not all that much pensioners can do about it. If it looks like we won’t pay off formal short-term debt, markets can fail to roll over, leading to an immediate financial crisis.”
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Yeah, exactly. And that’s what the politicos that are signing union pension contracts are counting on, the fact that the doo-doo is going to hit the fan when they’re long gone.
