The Economist has this article on U.S. pension obligations. The chart is interesting. Assuming that the pension funds are able to achieve their most optimistic dreams of an 8 percent annual return on investment, the U.S. states in the chart will run out of money in their pension funds in between 8 and 20 years. Once the funds are exhausted, the pension obligations will consume between 30 and 55 percent of forecast tax revenues.
Separately, an NBER researcher says that we shouldn’t fund public pensions at all, but simply raise taxes when the money is due (PDF paper). Towards the end he simplifies his argument: “Why should taxpayers vote to accumulate assets in a public retirement plans that buys Treasury notes yielding, say, 2% when they are paying 15% interest on their credit cards and 7% on car loans?” If the state needs money in 2020, why should taxpayers borrow money now to pay higher taxes when instead the taxpayers could borrow less and pay higher taxes in 2020? If this guy is right, our public employee pension funds are ridiculously overfunded.
Interesting, I wasn’t aware that US states actually tried to fund their pension liabilities. Here in the UK the government funds the State Pension on the “pay-as-you-go” method, ie pays current benefits out of current tax receipts (or borrowings) and makes no effort to fund future liabilities.
The problem of course is that when the boomers move solidly into retirement there will be fewer people working to pay the benefits. So the boomers enjoyed comparatively light taxation while working, to pay the previous generation, and will expect similar benefits: that will be a much heavier burden on their kids.
Stephen: The UK State Pension is comparable to the US Social Security system. Social Security is funded on a current basis, more or less, with today’s payroll taxes being turned into today’s checks to retired Americans. Social Security has no financial problems because Congress can redefine it at will, e.g., cutting payments or raising the retirement age to 75. The Economist article was looking at what U.S. state’s owe to former public employees, such as teachers, policemen, and firefighters. These pensions have defined benefits determined by union contracts with individual states and there is no established legal mechanism for taxpayers to escape from commitments made by their elected officials starting in the 1960s when unionization became common for government workers.
It is comparable to the defined pensions offered to the UK’s local government employees. The BBC have a handy ‘What we’re going to have to pay them’ guide here: http://www.bbc.co.uk/news/business-11446833 , highlighting 2007’s £27bn deficit (probably higher today).
It also highlights the future unfunded liabilities for current government employees (civil servants) as £153bn here http://www.bbc.co.uk/news/business-11446835. From my mental arithmetic, there looks to be roughly £780bn in future unfunded liabilities highlighted in public sector pensions.
Yes, you’re right. In theory the State Pension should be sufficient for retirees, but most private employees have some form of pension plan, the lucky with defined benefit, the rest with money purchase schemes. You’d think the existence of the State Pension would mean the government wouldn’t need to provide pensions to public employees, but most have gold-plated defined-benefit plans that will lead to similar problems to those you note in the US. The BBC’s plan, for example, has a £1bn shortfall that will require reduced benefits and greater contributions to fix, much to the disgust of current employees, who want the corporation to use licence fee money to preserve their benefits. Fortunately, the coalition government can at a single stroke get rid of thousands of jobs; a document leaked today suggests half a million over the next couple of years. The unfettered power of central government makes things easier- if you have the right government!