The states' pension bomb

The problem with the defined benefit pension plans for government employees used by most states has been ably described by AT News Editor Ed Lasky on many occasions. Basically, as this Reason Magazine article points out, the problem is in the difference in accounting practices between public and private plans:

Pension funds need to assume a certain rate of return on their current assets in order to gauge whether or not the assets held today will be enough to pay future benefits. Obviously, the assumed interest rate or rate of return has a major impact on whether a pension plan is adequately funded. Most pension plans would rather play it conservatively and assume a lower rate of return, so that they ensure that the assets they have today will be enough to cover tomorrow's promised benefits. But the states would rather put less money up front today, so they're pinning all their hopes of being able to pay benefits tomorrow on an 8.5 percent annual growth rate. If that 8.5 percent growth rate doesn't come to fruition, either tomorrow's beneficiaries will see a cut in their benefits or taxpayers will be asked to pick up the tab. It would be much more prudent to assume an adequate risk-adjusted rate of return closer to the rate offered on 15-year Treasury bonds-3.5 percent, say-and fund their plan accordingly.

An unrealistically high discount rate also means that states are highly discounting the likelihood of future payments. In other words, the states are essentially stating that there's a low probability that they'll have to pay their pensioners. That is silly.
State officials not only failed to set aside sufficient money to fund future benefits, but they also illogically assumed that the riskier the investment, the better funded the plan would be.

This smoke and mirrors accounting now has taxpayers on the hook for trillions of dollars. According to the article. 10 states will run out of pension fund money by 2020. The resulting fiscal catastrophe will drive taxes through the roof while cutting state budgets beyond reason.

Would the American people be supporting the Wisconsin unions if they knew what they were in for?


The problem with the defined benefit pension plans for government employees used by most states has been ably described by AT News Editor Ed Lasky on many occasions. Basically, as this Reason Magazine article points out, the problem is in the difference in accounting practices between public and private plans:

Pension funds need to assume a certain rate of return on their current assets in order to gauge whether or not the assets held today will be enough to pay future benefits. Obviously, the assumed interest rate or rate of return has a major impact on whether a pension plan is adequately funded. Most pension plans would rather play it conservatively and assume a lower rate of return, so that they ensure that the assets they have today will be enough to cover tomorrow's promised benefits. But the states would rather put less money up front today, so they're pinning all their hopes of being able to pay benefits tomorrow on an 8.5 percent annual growth rate. If that 8.5 percent growth rate doesn't come to fruition, either tomorrow's beneficiaries will see a cut in their benefits or taxpayers will be asked to pick up the tab. It would be much more prudent to assume an adequate risk-adjusted rate of return closer to the rate offered on 15-year Treasury bonds-3.5 percent, say-and fund their plan accordingly.

An unrealistically high discount rate also means that states are highly discounting the likelihood of future payments. In other words, the states are essentially stating that there's a low probability that they'll have to pay their pensioners. That is silly.
State officials not only failed to set aside sufficient money to fund future benefits, but they also illogically assumed that the riskier the investment, the better funded the plan would be.

This smoke and mirrors accounting now has taxpayers on the hook for trillions of dollars. According to the article. 10 states will run out of pension fund money by 2020. The resulting fiscal catastrophe will drive taxes through the roof while cutting state budgets beyond reason.

Would the American people be supporting the Wisconsin unions if they knew what they were in for?


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