US public pensions face 2 trillion dollar deficit

[Modelworks]

This one is going to really really hurt. We have borrowed to the point the bank has no more money to lend and people can't afford to pay more in taxes. The states cannot make up the shortfall, I really don't see how we are going to get out of the financial mess .


http://www.ft.com/cms/s/0/bd1c2552-f966-11de-8085-00144feab49a.html?nclick_check=1

The US public pension system faces a higher-than-expected shortfall of more than $2,000bn that will increase pressure on many states’ strained finances and crimp economic growth, according to the chairman of New Jersey’s pension fund.

The estimate by Orin Kramer will fuel investors’ concerns over the deteriorating financial health of US states after the recession. “State and local governments are correctly perceived to be in serious difficulty,” Mr Kramer told the Financial Times.

“If you factor in the reality of these unfunded promises, their deficits will rise exponentially.”

Estimates of aggregate funding requirement of the US pension system have ranged between $400bn and $500bn, but Mr Kramer’s analysis concluded that public funds would need to find more than $2,000bn to meet future pension obligations.

A shortfall of that size could force state governments to take unpalatable decisions such as pouring more public money into their funds or reducing pension benefits. State and local governments have already cut spending to close budget deficits

Mr Kramer, chairman of New Jersey’s investment council and also a senior partner at the hedge fund Boston Provident, warned that outdated accounting models and unrealistic expectations of future returns had led states to underestimate their pension requirements.

Public pension funds do not use mark-to-market accounting, relying instead on actuarial numbers that average out value of assets and liabilities over a number of years – a process known as “smoothing”. Mr Kramer’s analysis used the market value of the assets and liabilities of the top 25 public pension funds at the end of the year.

He also looked at market interest rates, which are used by corporate pension funds and are lower than the rate of return of about 8 per cent employed by public funds, to calculate future returns. Using the 8 per cent rate of return, the funding requirement of the US public pension system would still be about $1,000bn.

Mr Kramer, a power broker in the Democratic party, criticised the financial metrics used by public funds and argued that his assumptions were more realistic.

“The accounting treatment of public retirement plans is the political leper colony of government accounting. It is a no-go zone,” he said.

Pension funds’ requirements are expected to compound the pressure on local finances. Thirty-six of the 50 US states, including California and New York, have plunged into budget deficits since fiscal year 2010 began, which for most states was July 1 2009, according to the National Conference of State Legislatures.

 

[Greenman]

The State pension systems have been the 800 pound gorilla in the room for years. But as with most major problems, nothing will be done until it becomes a crisis. I think it's going to be a disaster of biblical proportions, and a lot of folks are going to be really pissed off when they see what a sweet deal those "under paid" government employees get.

 

[StageLeft]

No need for them to worry, the rest of us will pick up the slack via deficits and/or more taxes, this is writ in stone and beyond question. After-all, it was "promised" to them, so how dare you as a non-government worker not fulfill the promise you did not make? And never mind that to do so directly and irrevocably hurts your own retirement because you are paying for theirs.

Gov should not give preferential elite-citizen status to those who work for it as opposed to those who fund it, which it currently does; public pensions are ridiculous.

 

[LegendKiller]

As with any calculations for pensions, they are highly variable and point-in-time. The calcs are complex, based upon actuarial estimations, inflow and outflow, asset appreciation, among thousands of other inputs.

The biggest problem is that most of the estimates fed into the calculations have assumed too high rate of returns while reducing the estimated life-span of the users. This reduces the amount of money required up-front to meet the obligations, resulting in short-falls.

Even worse is the raiding of the pensions when the are "overfunded", which, from my perspective, is a lie. "overfunding" is when the assets appreciate higher and exceed the estimated obligations. The pension manager than declares an over-funding, which allows the manager to raid the pension.

The problem is that most states/companies/governments, do not account for the fact that no asset appreciates at EXACTLY the rate of return required for the obligations, it will go up and down over that estimation, so the "overfunding" is nothing more than greater-than-mean appreciation, which will revert to the mean over time.

They should outlaw "overfunding" raiding.

 

[palehorse]

No need for them to worry, the rest of us will pick up the slack via deficits and/or more taxes, this is writ in stone and beyond question. After-all, it was "promised" to them, so how dare you as a non-government worker not fulfill the promise you did not make? And never mind that to do so directly and irrevocably hurts your own retirement because you are paying for theirs.

Gov should not give preferential elite-citizen status to those who work for it as opposed to those who fund it, which it currently does; public pensions are ridiculous.

At least the Federal government saw this coming and ditched the Federal "sweet deal" pension system a while ago. It's just too bad that most States didn't do the same...