Public-sector pension problems

Regular Locker Room readers are familiar with the problems associated with governments’ neglect of their public-sector pension obligations.

The latest Bloomberg Businessweek also shines a light on the problem:

San Diego provides a revealing case study. It costs a sum equivalent to 11 percent of the city payroll to keep the pension current each year. In other words, for every dollar that San Diego pays out in salary, it accrues 11 cents in future pension liabilities. If San Diego only had to set aside that 11 cents, people wouldn’t mind. But it doesn’t. It has to put 41 cents into the pension plan for every dollar of payroll. That’s because the city fell far behind on funding its pension plan, which has been further depleted by successive Wall Street crashes. San Diego’s future pension obligations are currently underfunded by one-third, according to a spokesman for the city’s retirement system. Like a home dweller who skipped years of mortgage payments, the city has seen its servicing costs skyrocket: Its annual pension payments have jumped from $68 million in 2002 to $231 million.

The story’s the same around the country. City officials in Costa Mesa, Calif., have informed nearly half of municipal workers that they can expect to be laid off in September. Fiscally strapped Republican governors such as New Jersey’s Chris Christie and Wisconsin’s Scott Walker, and even true-blue Democrat Andrew Cuomo in New York, are furiously trying to restrain pension costs. U.S. public pension systems are underfunded by about $1 trillion, according to the National Association of State Retirement Administrators (NASRA), and some estimates put the figure as high as $3 trillion. The gap is due to a bitter dispute regarding the proper rate at which to discount future pension liabilities. States arguably have used rates that understate their debts, although the question of what exactly is the proper discount rate is not easily resolved. The deficit, in any case, is huge—indeed, it dwarfs the losses suffered to date by the federal government in the mortgage crisis.

Mitch Kokai / Senior Political Analyst

Mitch Kokai is senior political analyst for the John Locke Foundation. He joined JLF in December 2005 as director of communications. That followed more than four years as chie...

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