They promised too much

State governments have vastly underfunded public pensions. Here is the abstract to a new NBER paper, The Intergenerational Transfer of Public Pension Promises by Novy-Marx and Rauh.

The value of pension promises already made by US state governments will grow to approximately $7.9 trillion in 15 years. We study investment strategies of state pension plans and estimate the distribution of future funding outcomes. We conservatively predict a 50% chance of aggregate underfunding greater than $750 billion and a 25% chance of at least $1.75 trillion (in 2005 dollars). Adjusting for risk, the true intergenerational transfer is substantially larger. Insuring both taxpayers against funding deficits and plan participants against benefit reductions would cost almost $2 trillion today, even though governments portray state pensions as almost fully funded.

Time to pay for the great promises they made. People ask. Politicians give. Let someone else solve the problems we create.

But now is the time to pay. And there is not enough money. The solution is selling more bonds. And you and I have to pay the interest on the bonds to the bond holders.

We lose purchasing power and they will have to cut the great services and the great pensions they promised.

The lesson we are learning is that we have to pay for the services and benefts we want. They are not "free". It just cannot be good news for the economy. Let's keep our fingers crossed.

George Dagnino, PhD
Editor, The Peter Dag Portfolio. Since 1977
Ranked Top Market Timer in 2009 and 2010 by Timer Digest

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