Category Archives: unfunded liabilities

22/5/17: U.S. Public Pensions System: Insolvent to the Core


A truly worrying view of the U.S. public sector pensions deficits has been revealed in a new study by Joshua D. Raugh for Hoover Institution. Titled “Hidden Debt, Hidden Deficits” (see http://www.hoover.org/sites/default/files/research/docs/rauh_debtdeficits_36pp_final_digital_v2revised4-11.pdf) the study opens up with a dire warning we all have been aware of for some years now (emphasis is mine):  “Most state and local governments in the United States offer retirement benefits to their employees in the form of guaranteed pensions. To fund these promises, the governments contribute taxpayer money to public systems. Even under states’ own disclosures and optimistic assumptions about future investment returns, assets in the pension systems will be insufficient to pay for the pensions of current public employees and retirees. Taxpayer resources will eventually have to make up the difference.”

Some details: “most public pension systems across the United States still calculate both their pension costs and liabilities under the assumption that their contributed assets will achieve returns of 7.5–8 percent per year. This practice obscures the true extent of public sector liabilities.” In other words, public pension funds produce outright lies when it comes to the investment returns they promise to generate. This, in turn, generates delayed liabilities that are carried into the future, when realised returns come in at some 3-4 percent per annum, instead of promised 7.5-8 percent.

How big is the hole? “In aggregate, the 564 state and local systems in the United States covered in this study reported $1.191 trillion in unfunded pension liabilities (net pension liabilities) under GASB 67 in FY 2014. This reflects total pension liabilities of $4.798 trillion and total pension assets (or fiduciary net position) of $3.607 trillion.” This accounts for roughly 97% of all public pension funds in the U.S. Taking into the account the pension funds’ penchant for manipulating (in their favor) the discount rates, the unfunded public sector pensions liabilities rise to $4.738 trillion.

“What is in fact going on is that the governments are borrowing from workers and promising to repay that debt when they retire. The accounting standards allow the bulk of this debt to go unreported due to the assumption of high rates of return.”

Actually, what is really going on is that the governments create a binding contract with their employees to loot - at some point in the future - the general taxation funds to cover the shortfalls on these contracts. How much looting is on the pensions liabilities? Take the unfunded liability estimate of $4.738 trillion. And consider that in 2014, total revenues collected by state and local governments stood at $1.487 trillion. Pensions deficits alone amount to 3.2 times the underwriters’ income. In household comparative terms, this is like having a full 100% mortgage on a second home, while still running a full 100% mortgage on primary residence (day-to-day expenses).

Or, put more cogently, the entire system is insolvent. And is getting more insolvent, the longer the local and state governments refuse to use more honest accounting models.

Couple of charts to illustrate




CHART 2: State Contributions: Actual vs Required to Prevent Rise in Unfunded Liability

Now, observe in the above: the distance between the green triangle (required contributions) and the blue dot (actual contributions) is the gap in public pensions funding that has to be extracted to make the contracts whole. This will either have to come from tax hikes or from increased contributions from the public sector workers or from cut in future benefits to these workers. Or from all three.

In a range of the states, e.g. California, New Jersey, Illinois, etc we are already facing draconian levels of taxation, and falling real incomes of private sector workers. In a range of other states, municipal and local taxes are high, while the cost of living increases are swallowing income growth. In other words, there is not a snowball’s chance in hell these gaps can be funded from general taxation in the future.

When all ameliorating assumptions are made (to the upside for public pensions schemes), Raugh concludes that “despite markets that performed well during 2009–2014, state and local government pension systems are still underwater by $3.4 trillion. With relatively poor performance in fiscal years 2015 and the first part of 2016, this figure is likely to be even larger today. Finally, the report reveals the extent to which state and local governments are in fact not running balanced budgets. While they contribute 7.3 percent of their own-generated revenue to pensions, the true annual ex ante, accrual-basis cost of keeping pension liabilities from rising is 17.5 percent of state and local budgets. Even contributions of this magnitude would not begin to pay down the trillions of dollars of unfunded legacy liabilities.”

Yes, the entire system of public pensions is insolvent. No surprise there. And there is not enough fiscal space to recover from that insolvency without cutting benefits, raising taxes and hiking employee contributions. No surprise there either. Finally, although Raugh does not say so himself, it is pretty clear that there is zero will on either side of the Washington’s political divide to do anything tangible to address the problem.


Note: you can read a series of previous posts covering various sides of household debt in the following threads: Total Household Debt http://trueeconomics.blogspot.com/2017/05/19517-us-household-debt-things-are-much.html; U.S. Social Security Insolvency  http://trueeconomics.blogspot.com/2017/05/19517-reminder-social-security-is-only.html, and Student Loans Explosion http://trueeconomics.blogspot.com/2017/05/21517-student-loans-debt-bubble-is.html).

19/5/17: A Reminder: Social Security is Only Getting More Insolvent…


On foot of my earlier post on U.S. household debt, it is worth mentioning another, much-overlooked in the media, fact concerning U.S. real economic debt crisis. This fact is a staggering one, even though it has been published a year ago, back in April 2016.

Based on the 2016 OASDI Trustees Report, officially called "The 2016 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds" (see link here: https://www.ssa.gov/oact/TR/2016/index.html).
  • U.S. Social Security's total income will exceed total cost of Social Security payouts through 2019. However, beyond 2019, interest income and money taken out of reserves will have to cover the funds required to offset Social Security's annual deficits until 2034.
  • Assuming the U.S. Presidential Administrations and the Congress continue business as usual approach to Social Security, the federal government payroll taxes will only be able to cover roughly 75% of scheduled retirement benefits until 2090
  • As the result, the Social Security Administration now projects that unfunded obligations will reach USD 11.4 trillion by 2090 or some $700 billion higher than the USD 10.7 trillion shortfall projected a year ago
  • Worse:  on an "infinite horizon" basis (netting Social Security expected future liabilities from forecast revenues) Social Security will face a USD 32.1 trillion in unfunded liabilities by 2090, or staggering USD 6.3 trillion more than 2015 projection
Chart below plots forecast Social Security unfunded liabilities corresponding to each forecast year:


The above clearly shows that the Social Security 'stabilisation' achieved in 2014-2015 is now not only erased, but is set back to what appears to be a rapid acceleration in liabilities back to 2008-2014 trend.

Yes, Social Security is a system in which people pay in taxes for an 'allegedly' ringfenced program that is supposed to supplement retirement. No, Social Security is not a program that is actually contractually ringfenced to provide anything whatsoever to those who pay into it. Which, really, means that the default on Social Security is looming large for the millennials and subsequent generations. And this raises the issue of what will happen to pensions provision across the entire U.S. Currently, even public sector pensions (across states and municipalities) are facing severe uncertainty and, in an increasing number of cases, actual cuts. Which raises public reliance on Social Security just at the time that the Social Security system is facing higher threats of insolvency. 

Meanwhile, household debt situation is getting from bad to awful (see this post: http://trueeconomics.blogspot.com/2017/05/19517-us-household-debt-things-are-much.html). 

The status quo is a prescription for a social, economic and political disaster. No medals for guessing what the Congress is doing about it all.

27/11/15: The Welfare State Going Broke, and You Know It…


Bruegel’s  Pa Huttl and Guntram Wolff have recently posted on Capx.co results of their study, under a handy title “Lack of confidence in the welfare state in the year 2050” (link here).

One chart sums up key evidence:


Thus, across eight European countries,

  • Majority of those polled felt that by 2050 public welfare systems will provide inadequate supports for pensions (59.5% of those polled) and for the unemployed (52.4%). 
  • Roughly half of those polled thought that care for the elderly (49.5%) will be inadequately supplied by the public welfare systems, and 
  • Over 45% thought that healthcare supply will fall short of their expected standards (45.4%). 


Darn scary numbers these are, even though, in my opinion, these are still too optimistic. The levels of implied state debt relating to what we call 'unfunded obligations' - contractually specified future commitments across pensions and healthcare benefits (excluding statutory, but non-contractual obligations) implies much lower probabilities of the modern welfare states being able to sustain current levels of funding.

Good example is the U.S. where current official debt stands at around USD18.5 trillion, whilst unfunded civilian and military pensions, plus Social Security and Medicare, inclusive of other contractually set Federal commitments and contingencies add another USD46-47 trillion to that (you can read more on this here)