The average public pension plan is only 41 percent funded, when calculated with the same financial methods used in the private sector, according to a recent report written by PublicSectorInc.org contributor Andrew Biggs. Using a fair market valuation approach that captures the value of pension benefits guaranteed to be paid as opposed to using unrealistic Government Accounting Standards Board assumptions based on the highly unlikely expected returns on stocks, private equity, or hedge funds, Biggs finds that public pensions "face unfunded liabilities of approximately $4.6 trillion dollars."
Although advocates of maintaining the status quo, as well as the GASB, have argued "government is inherently different from the private sector" and feel that "different accounting standards should apply," Biggs rightfully points out major flaws in this logic. First, government cannot go out of business so "government pension benefits are more likely to be paid than private pensions" which justifies a lower rather than higher discount rate currently being applied to public pension funds. Second, government's longevity makes pension liabilities inescapable. Rather than defaulting like a private corporation facing bankruptcy; government shifts the cost of the pensions to future generations. That is, government transfers risk between a number of stakeholders--taxpayers, public employees, bondholders, and those who receive government aid.
Using fair market valuation, "unfunded liabilities are equal to roughly 30 percent of gross domestic product," a massive burden on federal, state, and local governments especially when considered with rising debt and unfunded entitlement costs. Given these soaring costs, pensions may well become tomorrow's financial crisis. Let's hope crisis is avoided and more states continue following lessons learned in Wisconsin.
"government cannot go out of business"
On the contrary, most governments we have in the world today are replacing others that did go out of business.
Quoting ..."Let's hope crisis is avoided and more states continue following lessons learned in Wisconsin. "
The BEST lesson learned in Wisconsin was the end of Public Sector "Collective Bargaining".
THAT'S what need to be done EVERYWHERE, throughout the country.
The "gov't Sector" sure IS different.
The worker's Union puts in Place (via campaign contributions and election support) legislators who will do their bidding (better pay, pensions, and benefits).
Those legislators aren't paying for those pension "promises" with their money, but taxpayer's money and the TRUE cost of those promises is often well understated .... and deferred to future taxpayer once they have left office.
Managers who always get paid more than their workers have an incentive to pay MORE than what is necessary to attract and retain a qualified workforce...... since they will then get even more.
And on ..... and on ..... and on ......
TAXPAYERS ..... RENEGE on any further funding of these fraudulently obtained "promises"
Tough Love and SoaG, thank you for joining the discussion on PublicSectorInc.org; your time and comments are greatly appreciated.
SoaG-- although you're correct in pointing out that nations go bankrupt (Argentina in 2001 and Germany following WWI and WWII standout as two examples), modern history suggests that these states were not replaced. Instead, a number of ills follow from a nation's insolvency like massive interest rates (upwards of 20%) that discourage investment and growth, hyperinflation for consumers and businesses, and plummeting stock prices. Given the United States' position as the largest economy in the world, bankruptcy would mean the most severe economic depression in modern history. Bankruptcy really isn't an option.
Tough Love--you're absolutely correct. The public sector's ability to collectively bargain along with their political power makes them formidable opponents for any type of legitimate reform. I would encourage you to read my colleague, Dan DiSalvo’s recent post about the power of teacher unions influencing politics.
Andrew, Via my work in the financial sector, I am well versed in Pension Plan design and funding and have commented on the excesses of Public Sector pensions few several years (to the dismay of quite a few public Sector workers who oppose reform).
The following is a very concise summary of the problem posted as a comment to pension-related article a few days ago by Mark D. Hill from California:
"The absolute power these unions have over all of us is frightening...for me, its simply stunning that these pirates have gamed this system so well, that even with bright flashlights of truth and excesses, they don't blink, let alone run. They believe this is their right...they are worth it...and with a straight face tell taxpayers "good luck trying to change the rules...we made em." This County, this State and perhaps our Country, has been hijacked by these government employees who, sadly, supposedly work(ed) for us. They don't...our Legislators, City Councils and Governor (and President), work for them.....and the credit card bills they have racked up...is undeniable evidence that. Today, tragically, they are right. God help us. "