Public Pension Deficit Exceeds $3 Trillion?

An article in the Wall Street Journal written by Andrew Biggs argues that state pension plans are underfunded to the tune of $3 trillion.

"Pension plans for state government employees today report they are underfunded by $450 billion, according to a recent report from the Pew Charitable Trusts. But this vastly underestimates the true shortfall, because public pension accounting wrongly assumes that plans can earn high investment returns without risk. My research indicates that overall underfunding tops $3 trillion.

The problem is fundamental: According to accounting rules adopted by the states, a public sector pension plan may call itself "fully funded" even if there is a better-than-even chance it will be unable to meet its obligations. When that happens, the taxpayer is on the hook. Yet public pension plans ignore market risk even as they shift into risky foreign investments, hedge funds and private equity."

Biggs' argument is that the pension plans are assuming unrealistic future investment returns that will meet their mandated, long-term payout amounts.

Politicians are fond of using taxpayer money to buy votes. In this case, they have over promised pension amounts to public workers, and will expect taxpayers to make good on these promises in the coming years.

Taxpayers should keep a close eye on these pension amounts in their states and municipalities, and start taking action now to ensure that politicians are aware that they need to ratchet down these promises in their ongoing negotiations with public unions.