State Pensions are Way Underfunded

12/02/08 - EconLog by Arnold Kling   --> Source

[edited] The paper below from September points out that underfunding in state pensions far exceeds that of corporate pension plans, which also are troubling. Since then, I guess that many of the pension funds have lost 25 percent or more of their value.

If you are an opponent of markets and a fan of government, then please explain why you are not frightened by the power of government to create enormous unfunded liabilities.

Read more ... Kling quotes the paper by Robert Novy-Marx and Joshua D. Rauh:

[edited] Government accounting rules obscure the underfunding of public pension plans; they allow pension liabilities to be discounted at expected rates of return on pension assets. [Smaller amounts are set aside, expecting investment returns to make up the difference.] Our analysis demonstrates that current public pension policy places a large burden on future generations.

The plans appear almost fully funded under government-chosen discount rates [estimates of generous increases in investment value], but there is a large probability of significant shortfalls in the future. The shortfalls are likely if the economy performs poorly, and so are particularly costly to future generations. The cost to taxpayers of fully providing for plan participants would approach $2 trillion ($2,000 billion).

So, the states are saying, we aren't setting aside much now, but future taxpayers will pay for all of our retiring workers. If you are a state worker, here is your deal. Work for the state today, and we will give you money after we current officials are out of office or retired ourselves. Do you think that you will collect?

For comparison, the total 2007 production of the U.S. was about $14 trillion. If you make $50,000 per year before tax, you will owe 2/14ths = $7,140 in extra tax to cover those pensions. Sorry, no deductions on that one.