Government Public Pension Liabilities Are Understated By Trillions: New Study

Chart via Hoover

A recent report from Stanford University’s Hoover Institution details the “Hidden Debt” and “Hidden Deficits” contained in state and local government pension unfunded liabilities. The report begins by stating:

“despite the introduction of new accounting standards, the vast majority of state and local governments continue to understate their pension costs and liabilities by relying on investment return assumptions of 7-8 percent per year. This report applies market valuation to pension liabilities for 649 state and local pension funds. Considering only already-earned benefits and treating those liabilities as the guaranteed government debt that they are, I find that as of FY 2015 accrued unfunded liabilities of U.S. state and local pension systems are at least $3.846 trillion, or 2.8 times more than the value reflected in government disclosures. Furthermore, while total government employer contributions to pension systems were $111 billion in 2015, or 4.9 percent of state and local government own revenue, the true annual cost of keeping pension liabilities from rising would be approximately $289 billion or 12.7 percent of revenue. Applying the principles of financial economics reveals that states have large hidden unfunded liabilities and continue to run substantial hidden deficits by means of their pension systems.”

By using unrealistic investment targets and only reporting the earned benefits as liabilities, the public pension system under represents the complete picture of its unfunded liabilities.  As of fiscal year 2015, the complete accounting for unfunded liabilities from all cities, states, governments were $1.378 trillion. This is after recently implemented governmental accounting standards. Nevertheless, these accounting methods do not incorporate more market valuation techniques which treat future obligations as a capitalized long term debt. This problem arises because recent reforms in governmental accounting permitted pensions to assess their liabilities based expected return on assets. Thus, there is little allotment for the inherent risk posed by these projections. Especially, when pensions place expected rates of returns at 7.6%(a expected rate return that is proving difficult to obtain) which would mean that they expected the value of their money to double approximately every 9.5 years. These projections create distortions that under state the true cost of the unfunded portion of the pension liabilities. According to the report:

“The market value of unfunded pension liabilities is analogous to government debt, owed to current and former public employees as opposed to capital markets. This debt can grow and shrink as assets and liabilities evolve. From an ex ante perspective, the economic cost of the pension system to the sponsor is the present value of the increase in pension promises (service cost) plus the cost incurred because existing liabilities come due a year sooner (interest cost). Under lower discount rates, the service cost is higher but the interest cost is lower.”

The complete report can be read here

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2 Comments on "Government Public Pension Liabilities Are Understated By Trillions: New Study"

  1. Nothing new, this SCAM has been known for the last 20+ years.

  2. It’s unfortunate that future generations, unable to vote today, will bear the costs of many enacted pension programs, entitlements and boondoggle projects, requiring them to pay higher taxes and work later into their lives to pay for these promises. It’s the inmates running the pension Asylum that are loading up system with lucrative packages for themselves, to be paid for by taxpayers.

    The international business world is intelligent enough to know that DEFINED BENEFITS, neither capped nor precisely quantifiable in advance, financial disasters to any business, thus all businesses focus on the known, i.e., defined CONTRIBUTIONS alone.

    Stealing from the young who have no votes, but silently shoulder the costs and bear the burden of unfunded promises of these programs to enrich the old seems to describe the Governments expansion of entitlement benefits and other government services, along with the taxes young people will have to pay to support them, mostly to subsidize older Americans.

    The inmates know that debt for our future generations buys votes. Over the decades, the proven “concept’ practiced by voters is to defer as much financial responsibilities as possible from our current financial responsibilities to future generations, that have no votes on the subject. Simply stated, if we cannot afford it today, pass it off to the future generations to minimize any impact on our current lifestyles.

    Another insult to the taxpayers and future generations paying their pensions is that many of those early retirements collect their guaranteed pensions, and then take a second job.

    Virtually all elected officials are heavily financed by unions which are focused on entitlements for their current members. The unions, government, and other bureaucrats have been very successful in manipulating the system to enrich themselves. Thus, no changes can be expected in the foreseeable future for elected officials to ever abandon their source of votes.

    Even before those young folks can vote our Golden State schools are on track to force substantial budgetary cutbacks on core education spending, as public schools around California are bracing for a crisis driven by skyrocketing worker pension costs that are expected to force districts to divert billions of dollars.

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