Alexandria, U.S.A. — On July 18, State Budget Solutions (SBS), a nonprofit organization advocating for fundamental reform of state finances, released a groundbreaking report on the true scope of the state and local public pension crisis. The SBS analysis found that the average public employee pension plan is only 41 percent funded while total unfunded liabilities as of 2011 are at least $4.6 trillion.
“State Budget Solutions’ pension study shows that our country is trillions of dollars in debt, and this is a hole that will overtake local and state governments if immediate action is not taken,” said Bob Williams, President of State Budget Solutions. “There is no option for status quo or incremental adjustments. Drastic reforms, innovations and political courage are needed to put our states and municipalities back on the path to fiscal survival.”
Recent reports have claimed that pensions were only underfunded by $885 billion as of 2010. That number was calculated with accounting guidelines of the Governmental Accounting Standards Board (GASB). However, GASB ignores accounting standards used by economists requiring that assumed return on pension fund investments be based on the fact that pension benefits are guaranteed. Public pension funds calculate future debt based on politicians’ guesses about how much investments will earn and grow. Current GASB pension accounting standard follow that practice, and new standards set to go into effect by 2015 modify it.
Taxpayers must make up any difference between pension fund investment performance and promised benefits. However, governments do not have to include pension debt in their budgets.
State Budget Solutions’ report uses fair market value and risk-free investment returns to determine that the actual unfunded liabilities are $4.6 trillion. That more accurately reflects the value of promised benefits taxpayers must fund whether investments perform or not.
“Failing to understand the scope of the pension crisis sets taxpayers up for a bigger catastrophe in the future. Without government action, states, counties, cities and towns all over America will go bankrupt. That means essential public services must be cut, dedicated government workers laid off, disrupting or eliminating public health, safety and education,” said Williams. “It is vital to reform public pensions now. Real reform must be based on actual numbers instead of the optimistic outlook presented by using unrealistic assumptions.”
The calculations were done by Andrew G. Biggs, a former principal deputy commissioner of the Social Security Administration, associate director of the National Economic Council and director of research at the Congressional Institute. He has a doctorate from the London School of Economics and now is a resident scholar at the American Enterprise Institute.
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