Many (most!) state and local gubmnt pensions are seriously underfunded by any reasonable estimate. Well, they aren't underfunded if they can all earn about 25%/year forever, but let's be realistic: they are grossly underfunded and the taxpayers in those jurisdictions are going to be on the hook for the balance, out of general revenues. From here:
State and local public employees, for the most part, have DB retirement plans. Much discussion has occurred in recent years to estimate how underfunded they are: the estimates start at $1.3 trillion and go up from there. The difficulty is that calculating the amount depends on your estimate of future rate of return. Most plans themselves project they will earn 7 to 8 percent on their investments, and critics say that is too optimistic. [EE: 7 or 8% in perpetuity?? Those folks are super dangerously delusional]
The organization State Budget Solutions this month produced one such estimate, using a 3.2 percent rate of return (the 15-year Treasury bond yield rate). This calculates to public employee pension plans having only 39 percent of the assets they need to cover their promised payments—a $4.1 trillion gap. [emphasis in the original]
Here, via the Tax Foundation, is a map showing the percentage of underfunding in each state:
If I lived in one of those states with the low numbers, I would try to move. If I couldn't move, I would try to hide my assets somewhere that they'd be less vulnerable to increased taxation. And if I ran one of these states, I'd try to commit everything possible to fixed continued programmes for the future so the state could go to the Feds and say they had no choice but to beg for a bail-out.
It is hard to understand how people have let things get this far.
And it isn't just states in the US. Oil-rich Alberta has a bloated budget and an underfunded pension scheme, too.
Alberta’s pension has unfunded liabilities of $7.4 billion which, while affordable now, won’t be as the ranks of retirees grows and people collect benefits over longer lives. The number of active workers to retirees has already shrunk dramatically, so fewer people are paying more money to support retirees over a longer period. There’s a limit to how often pension plans can boost payments by active workers or ask taxpayers to foot a larger government contribution, and the market struggles of the past decade demonstrated how uncertain investment growth can be.
I really feel sorry for the younger generations. The older ones (with support from such insidious groups as AARP and CARP) have negotiated generous pension plans but have apparently been unwilling to pay the taxes required to fund the plans. And the younger generations will have to deal with the situation, including the possibility of having their parents live with them.
It is not just a bad joke that some years from now people will be writing about boomerang seniors instead of boomerang children.
Update: The C.D. Howe piece in the Globe and Mail has a better piece about the Alberta revisions.