Thursday, May 21, 2015

Unfunded Public Sector Pensions Are Harmful to Our Citizens' Health ... Same's True for Social Security and Medicare

There used to be an old radio commercial by Fram Oil which encouraged car owners to change filters regularly by saying, "You can pay me now, or pay me later."

That reminds me of the underfunded public sector pensions in many American cities and states today. And then, lest we forget, there are the biggest elephants in the room --- Social Security and Medicare.

Public sector pensions operate pretty much on the pay as you go method which obligates future generations of taxpayers to make good on the promises made by today's governing officials to future retirees. But there are huge problems developing across America with that unsustainable and unaffordable pay/go way of governing.

First, there's the unaffordability issue related to undeniable demographics. We're getting older as a society and fewer working age taxpayers will be sent the bill to pay for more retirees down the road. More leaving the workforce than entering it, in other words, means fewer payers and more goers. It definitely doesn't make for a healthy financial situation.

Second, the promises which have already been made are largely underfunded. The money isn't there to pay these future pension promises unless pension assets grow at unrealistically high rates over time.

Third, the rate of return assumptions used by governing entities to fund the promised pensions are unrealistic and too optimistic given our economic growth, employment, wages, debt service and inflation outlooks going forward. That in turn simply means we're going to be even more underfunded down the road than we are currently absent huge changes in either additional taxation or lower than promised benefits. 'Fram' again.

Fourth, I could go on but by now you get the message. Treat your IRA/ 401(k) opportunities seriously and pay attention to the enormous mess in taxpayer obligations for retirees in the public sector as well as Americans' alarmingly large and growing financial dependence on public sector pensions, Social Security and Medicare.

A Debt-Ratings Rift Rattles Chicago tells the tale of one large American city where using the word mess is an understatement of epic size:

"The world’s two largest ratings firms are divided in their view of Chicago’s fiscal health as the city grapples with a $20 billion pension hole, a potential preview of battles expected to break out around the U.S. as retirement obligations mount.

Moody’s Investors Service lowered Chicago’s bonds to junk status last week while rival Standard & Poor’s Ratings Services settled on an investment-grade A-minus rating , a more optimistic view of the nation’s third-largest city. As recently as five years ago, both firms gave Chicago the same grade of double-A-minus.

The highly unusual four-notch ratings gap is the result of a change Moody’s made two years ago when it decided it would no longer rely on the investing returns targets submitted by cities and states to calculate pension costs. Its own estimates are more conservative, meaning the city’s pension problems look worse.

Chicago represents the most prominent example yet of how diverging views of bulging pension obligations can have huge ramifications for financially strapped cities. The split views are befuddling investors and the bearish grades could lead to higher borrowing costs, difficulties refinancing debt and new doubts about navigating the $3.7 trillion municipal-debt market. . . .

Projected pension costs can vary greatly based on what state or local governments select as their return assumptions. Public officials are under pressure to keep those targets high as a way of avoiding higher taxes or benefit reductions as they try to recover from heavy investment losses incurred during the 2008 financial crisis.

State and local pension liabilities ballooned at more than twice the rate of their assets in the aftermath of the crisis, according to the National Association of State Retirement Administrators. Public pensions now have about $3.8 trillion in assets versus $5 trillion in liabilities . . . .

Philadelphia has $5.3 billion in unfunded pension liabilities, while Phoenix has $2.5 billion and Atlanta has $1.5 billion . . . .

What makes Chicago unique is the magnitude of its retirement shortfall. The city has only half the assets it needs to cover its pension liabilities, or the equivalent of four years of general operating budgets. Mr. Emanuel’s cost-cutting pension overhaul looks less likely to win court approval after the Illinois Supreme Court struck down a similar proposed law earlier this month that sought similar benefit cuts.

“As Mayor Emanuel has repeatedly stated, the City of Chicago’s financial crisis is real, urgent, and has been decades in the making,” said Chicago Deputy Mayor Steve Koch in a statement. . . .

Last week’s Moody’s downgrade—the fourth in two years for Chicago—could trigger around $2 billion in accelerated payments by the city, Moody’s said."

Summing Up

Public sector finance throughout America is a mess.

That's true for government agencies as well as many cities, states and the nation as a whole.

The unfunded debt and future obligations problem goes far beyond the acknowledged $18 trillion debt at the federal level.

As Donald  Rumsfeld might say, taken as a whole, it's a 'known unknown' but definitely well in excess of $100 trillion and more likely $200 trillion.

That's not being an alarmist. It's just facing facts.

It's time to get real.

That's my take.

Thanks. Bob.

No comments:

Post a Comment