Sunday, June 27, 2010
Just when you thought we were coming finally out of the last financial crisis, the New York Times Magazine warns that the next great economic crisis in the United States might involve public pensions:
Ever since the Wall Street crash, there has been a bull market in Google hits for “public pensions” and “crisis.” Horror stories abound, like the one in Yonkers, where policemen in their 40s are retiring on $100,000 pensions (more than their top salaries), or in California, where payments to Calpers, the biggest state pension fund, have soared while financing for higher education has been cut. Then there is New York City, where annual pension contributions (up sixfold in a decade) would be enough to finance entire new police and fire departments . . . .
Public pension funds are now massively short of the money to pay future claims — depending on how their liabilities are valued, the deficit ranges from $1 trillion to $3 trillion.
Pension funds subsist on three revenue streams: contributions from employees; contributions from the employer; and investment earnings. But public employers have often contributed less than the actuarially determined share, in effect borrowing against retirement plans to avoid having to cut budgets or raise taxes.
Although some retirement security scholars have started to pay more attention in recent years, much more research and scholarship needs to be devoted to creative and innovative approaches to these pressing problems.
Hat Tip: Elizabeth Dale