Tick, tick, tick …
That's the sound of a bomb getting ready to go off, one with the power to destroy taxpayers' lives and state budgets. This explosive is a "future bomb," set to blow up at a later, unknown date. But it's just as dangerous and deserving of our attention as any immediate threat.
For decades, state lawmakers and pension boards have been cooking the books and making the funds they manage appear to be more financially sound than they really are, creating a fiscal time bomb that will explode if policymakers don't work immediately to solve the problem they've created.
Resistance to pension-fund reform ideas, such as shifting from defined-benefit programs to 401(k)-like defined-contribution plans, has accelerated the bomb's detonation by ruling out the only way pensioners can be sure their benefits are there when they need them to be.
In 2016, Moody's Investors Service published a report adding up the value of states' net pension liabilities for the 2015 fiscal year. The bomb is primed to explode, researchers found.
"Total US state aggregate adjusted net pension liabilities (ANPL) totaled $1.25 trillion, or 119% of revenue in fiscal 2015 … The results, based on compliance with new GASB 68 accounting rules, set a new ANPL baseline and are poised to rise for the next two fiscal years as market returns fall below annual targets."
Most state pension plans are underwater and sinking at an accelerating rate, said Moody's Senior Credit Officer Marcia Van Wagner in a news release.
"The median return for public pension plans in FY 2016 was 0.52 percent compared to an average assumed investment return of 7.5 percent," Van Wagner said. "We project that aggregate state ANPL will grow to $1.75 trillion in FY 2017 audits."
In other words, the total value of government pension debt is expected to grow by 40 percent, and each American's share of that unfunded debt will grow by about 39 percent, climbing from $3,889.23 per person to $5,399.26 in just one year.
In Pennsylvania, the State Employees Retirement System (PSERS) assumes it will receive a 7.5 percent annual return on every investment it makes. In reality, PSERS only earned 0.4 percent on its investment of government employees' money, barely breaking even. In the long run, this means expected benefits won't be there when workers retire.
As of December 31, 2016, PSERS could only pay out about 59 cents on every dollar it promised to workers and retirees, leaving Pennsylvania taxpayers responsible for $1,523.44 per person in unfunded liabilities. And the problem is only getting worse. In 2017, the state's total pension liabilities ballooned to over $75 billion, increasing by about $172 per second, or about $14.8 million per day.
Pensions are benefits promised by lawmakers to current government employees, but the promise involves a third party who is unable to enter the contract: future generations. Because the people who will pay for the pensions have not yet been born, they cannot give consent. And because the current generation is not funding them or making their promises more realistic, it is an immoral proposition.
Now — not tomorrow, not next year, not some opportunity after the next campaign — is the time for lawmakers to defuse this bomb. If serious, far-reaching steps are not taken as soon as possible, lawmakers and taxpayers will soon find the future has become the present, and there won't be any way to stop what will surely be a financial catastrophe.
Jesse Hathaway (email@example.com) is a research fellow with The Heartland Institute.
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