Veronique de Rugy, senior fellow at the Mercatus centre, says the New Jersey pension system could run out of money “as soon as 2013.”
She may be right, but for the wrong reasons.
Looking at unfunded liabilities is a waste of time. In most states public pensions are not being funded with any semblance of actuarial rigour. It’s basically how much money do you have and how much can you get in concessions from the unions. The answer to both is usually “not much” and the players all give thanks that they don’t have any funding rules to follow so the charade can continue.
What unfunded liabilities represent are the value of accrued liabilities less the amount of current assets. The New Jersey plan claims to have $71.6 billion now. So if you accept the $44.4 billion as the amount of the unfunded, by simple maths, the liability number would be $116 billion. Interest rate is the major component of getting a liability number. For example, If you believe you can get 8% on your investments you can pay out a $10 annual pension if you now have $116 but if you can only get 4% you may need $245 to pay that same $10.
The flaw in Ms. de Rugy’s line of thinking is that New Jersey, and many other states, can claim that they are, in fact, making 8% on their money now (even if it’s only because of ‘quantitative easing’) so what’s the problem?
The problem is that the interest assumption is not so important at this low level of funding. If you make 8% interest on $245 billion it would result in $19.6 billion in earnings while 8% interest on $71.6 billion gets you is $5.7 billion. You’re already $13.9 billion in the hole even if you meet your interest assumption simply because you have a lot less money to invest than you should have.
With $71.6 billion left in the plan and annual payouts now at about $8 billion it’s unlikely that 2013 will be when the plan goes bust…….unless:
- Enough potential retirees are scared into retirement by having to pay 30% of their future health care costs
- Contribution holidays continue
- Another market ‘correction’ comes along when 64% of the funds are in stocks and alternatives
- Pension funds are raided to pay health benefits (same fund pays both) if the participants don’t go for the 30% co-pay
Ms. de Rugy and others are absolutely right to be panicked over the funded status of New Jersey’s public pension plans. They’re going down. But it’s not because of poor investment return. It’s because of poor planning, management, and oversight by a compromised political establishment abetted by a lack of regulation at the federal level and a lack of honest (i.e. not cowardly) advice at the professional level.
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