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Bailout Ahead

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The Pew Center reports,

$1 trillion. That's the gap at the end of fiscal year 2008 between the $2.35 trillion states had set aside to pay for employees' retirement benefits and the $3.35 trillion price tag of those promises.

...To a significant degree, the $1 trillion reflects states' own policy choices and lack of discipline
• failing to make annual payments for pension systems at the levels recommended by their own actuaries;
• expanding benefits and offering cost-of-living increases without fully considering their long-term price tag or determining how to pay for them; and
• providing retiree health care without adequately funding it.

In explaining that the states are unable to spend more during a recession, Paul Krugman coined the phrase "fifty Herbert Hoovers." May I suggest that "fifty Bernie Madoffs" would be the way to describe their pension decisions. Of course, unlike Bernie Madoff, the states wiill almost certainly be bailed out by the Federal government. Which itself is the 51st Bernie Madoff, making promises to future recipients of Social Security and Medicare that it has no ability to keep.

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CATEGORIES: Fiscal Policy

COMMENTS (9 to date)
Lee Kelly writes:

State bailouts will come with strings attached, and so the centralisation of power in Washington will continue unobstructed.

If the tea party crowd want states rights, they'll need to first get state financial independence, because while the federal governments is offering subsidies and bailouts, states' legal rights will mean nothing.

Ella writes:

At least there's no table for me to stare at and get depressed.

Justin Dailey writes:

Only $1 trillion? These days that amount seems like chump change...

Stamos writes:

Welcome to the I.C.E. (International Cost Exigency) era - you thought the markets were frozen these past months?... wait and see what is about to come...

Boonton writes:

How much of this is really real? The amount you need to 'fund' a pension program is highly sensitive to interest rates. When rates are high its quite easy for a plan to be well funded since high interest means high income which means a little bit of money today will get you the fund you need to payout in the future. Low rates, though, means that money grows slowly which means you need big contributions if you don't want to be underfunded.

So right now rates are superlow and funds are horribly 'underfunded'. But no one thinks that this is a long term state of affairs. If rates go up one or two points will the trillions of dollars of underfundedness suddenly fall by hundreds of billions or more? If so how real can we really treat a number that simply won't stay still?

Komori writes:


This is actually more real than the numbers show. State pension plans are... self-deludingly optimistic about the returns they can get. State pension programs are assuming and counting on between 7.5% and 9% rates, which is obviously not happening right now. Or ever, on safe investments, which, being pension plans, they should be biased towards.

No, this is an even bigger problem than this report indicates. A lot of state and local pension plans are taking some desperate flyers into extremely risky investments to try and cover for their shortfalls (note that those numbers above are their normal investment targets). Which, in the medium and long run, is only going to make the shortfalls bigger.

Expect lots of pain from these, especially in combination with public employee unions.

Linda Gottfredson's Apprentice writes:

Hmmm, perhaps it is no wonder then that so many politicians support unrestricted immigration.

The Ponzi scheme known as Social Security needs an ever increasing supply of marks.

It is unfortunate, then, and not realized by most of the elite, that immigrants are not all of the same quality and ability to contribute to the Government's Ponzi scheme.

mark writes:

I think a lot of people don't grasp the extent to which this issue drives our financial system. State and local pension funds are the biggest investors out there. But, because of the amount of benefits that have been promised, the funds are under incredible pressure to chase yield and alpha, in order to relieve the pressure the promises would otherwise place on the state and local taxpayer. When you see CALPERS, for instance, lose over half a billion in loans to a New York apartment complex investment, now you know why. When you see private equity and hedge funds make investments, these investors are often the biggest investors in those funds (in many cases because they can't otherwise get access to leverage to boost returns as demanded by the actuarial burdens).

vimothy writes:

When you write,

Which itself is the 51st Bernie Madoff, making promises to future recipients of Social Security and Medicare that it has no ability to keep.

What do you actually mean? Surely not that the government will be unable to supply the currency it issues to pensioners in the future. It goes without saying that the one thing the government can always find more of is dollars. Whether or not there are any real economic goods and services to swap these tokens for is of course another matter...

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