From the Financial Times comes word that there are $2 Trillion worth of unfunded pensions at just the state and local level in the United States. The Financial Times article relies on a study by Orin Kramer of New Jersey’s pension fund.
The estimate by Orin Kramer will fuel investors’ concerns over the deteriorating financial health of US states after the recession. “State and local governments are correctly perceived to be in serious difficulty,” Mr Kramer told the Financial Times.
“If you factor in the reality of these unfunded promises, their deficits will rise exponentially.”
Estimates of aggregate funding requirement of the US pension system have ranged between $400bn and $500bn, but Mr Kramer’s analysis concluded that public funds would need to find more than $2,000bn to meet future pension obligations.
This has huge implications for American taxation, and for residents in states and localities impacted by this (including California):
- Would the elected officials attempt to fix the unfunded pensions by decreasing benefits, decreasing eligibility, increasing taxes, or just ignore the problem?
- Would local officials declare Chapter 9 Bankruptcy? (Bankruptcy is not allowed for states.)
- Would individuals in impact locales move to avoid higher taxes?
- What impact will this have on public employee unions?
If you see a mess on the horizon, you’re dead-on accurate. Add in lots of problems on the state level, a very low return on lots of investments (which hurts pension funding), and extreme resistance to higher taxation and you end up with a Grade A disaster.
Some of the time the light at the end of the tunnel is the end of your problems. Here, I think it’s the oncoming train.
Tags: Pensions