Skip to comments.State Pension System Liabilities
Posted on 03/03/2011 8:15:33 AM PST by reaganaut1
In Policy Options for State Pension Systems and Their Impact on Plan Liabilities (NBER Working Paper No. 16453), co-authors Joshua Rauh and Robert Novy-Marx examine 116 state-sponsored pension plans, including all of those with more than $1 billion of assets, to estimate the extent of unfunded pension liabilities and how that issue might be addressed.
When states value their pension systems, they typically use a discount rate of 8 percent. The authors note that the principles of financial economics suggest using a much more conservative discount rate. "This means discounting either with a taxable state-specific municipal yield curve, which credits states for the possibility they could default on pension payments, or with a Treasury yield curve, which presents the benefit payments as default-free." The states estimate their unfunded liabilities at just under $1 trillion. That gap increases to $1.3 trillion using the municipal yield curve and to $2.5 trillion using the Treasury curve. The authors focus on the narrowest measure of liabilities, which is liabilities frozen as of June 2009, not accounting for future work by existing employees, new hires, or future pay increases.
These funding gaps are not only large but difficult to fill, even with relatively dramatic policy fixes. For example, eliminating generous early retirement benefits or raising the retirement age by a year would reduce liabilities by no more than 2 to 5 percent, this study finds. Reducing cost of living adjustments (COLAs) by a percentage point would have a somewhat stronger effect, reducing total liabilities by 9 to 11 percent. But even eliminating COLAs completely, or changing the Social Security retirement age, would leave state pension plans with some $1.5 trillion less than they need according to the Treasury discounting method.
A few states already have begun to move to address this problem. Minnesota and Colorado have reduced their COLAs, but they face legal challenges as a result. Rhode Island has increased the plan retirement age for employees who are not yet eligible for retirement benefits. So has Iowa, but again only for non-vested employees. Iowa has doubled its actuarial reductions, from 3 percent to 6 percent per year, effectively making early retirement less generous. Vermont has gone even further, implementing what is known as actuarially fair early retirement: it assesses early retirement penalties on workers below a certain age and service threshold. This study concludes that, while measures such as the ones being considered by these states may have modest effects on reducing unfunded liabilities, a large share of the unfunded liabilities will remain.
I think partial government defaults of already-promised benefits (and on municipal bonds) will be necessary. It will be a dog fight.
I just find this so interesting as it is suddenly a problem. They have known this was going to happen for YEARS. The baby boomers have not even begun to start retiring from Government service in droves yet. That is coming soon. The only thing that they can do is not give COLAs anymore. If a guy worked 40 years and has a 50,000 annual salary and he gets 80 percent, how can you lower it? I don’t think you can.
It’s the same problem as Social Security and Medicare on the federal level.
It’s very easy to make promises that somebody else will have to keep down the road.
This is so disgusting. I am so upset. I am about to retire from the military after 24 years. Now I am going to have to pay more for health care, no COLAs, etc. I don’t necessarily mind any of this on the whole, but what pisses me off is that there has not been one article about cutting medicaid, welfare, food stamps, etc. WTF????? Sorry for the language but I am very upset that the military and government workers who work for the military (I won’t include all government dole folks) are getting screwed.
Public service union pensions all need to be reviewed. We can’t afford this anymore.
Yeah...and I’d like to see drug testing for Welfare, food stamps, etc.....BEFORE any other changes are made...
Yeah...and Id like to see drug testing for Welfare, food stamps, etc.....BEFORE any other changes are made...
As long as somebody of serious responsibility would literally watch the urine go into the bottle than yes I agree, but if all they have to do is provide a sample on their own than what is the reason when they can just get somebody to provide....I know that most hang with folks of their own type druggies but somebody somewhere must be clean.....lol.
Yeah, I know .... I thought about HOW this could happen and the BUREAUCRATIC issues it would bring...BUT, I was just thinking I should go to my State Rep and since the Legislature is in session here...propose something like this.