States Warned of $2 Trillion Pensions Shortfall

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US public pensions face a shortfall of $2,500 billion that will force state and local governments to sell assets and make deep cuts to services, according to the former chairman of New Jersey’s pension fund.

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“States face cost pressure, most prominently from retirement benefits and Medicaid [the health programme for the poor],” Orin Kramer told the Financial Times.

“One consequence is that asset sales and privatisation will pick up. The very unfortunate consequence is that various safety nets for the most vulnerable citizens will be cut back.”

Mr Kramer, an influential figure in the Democratic party and still a member of the investment council that oversees the New Jersey pension fund, has been an outspoken critic of public pension accounting, which allows for the averaging of investment gains and losses over a number of years through a process called “smoothing”.

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Mr Kramer’s estimates are based on the assets and liabilities of the top 25 public pension funds at the end of 2010. The gap has risen from an estimate of more than $2,000 billion at the end of 2009.

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Although Mr Kramer said some local governments would experience “severe strain”, he did not foresee mass defaults.

“I don’t assume that you will have that level of defaults just because there are various remedies, including asset sales, that you can engage before you have to default,” he said.

http://www.cnbc.com/id/41129099

[Danno 1,228]

-Unions for public servants should be done away with. (In the end I think this may happen)

It's at it core, "unfair bargaining" with the union at a huge advantage.

-Folks who can't afford medical insurance and have their care provided by the state should at minimum, pay some type of co-pay.

[I AM NOT THAT GUY 5,715]

Now, this is scary.

Mr Kramer’s estimates are based on the assets and liabilities of the top 25 public pension funds at the end of 2010. The gap has risen from an estimate of more than $2,000 billion at the end of 2009.

He also used a market rate analysis based on the accounting used by corporate pension funds rather than the 8 percent rate of return that most public funds use in calculations. Pension liabilities are not included in state and local government debt figures.

[Sgt. McGee 27]

...face a shortfall of $2,500 billion...

Not really a comment on the article, but I've seen this notation appearing a lot lately, "2,500 billion", "3,100 trillion," etc. Why didn't they write it as 2.5 trillion? Or 3.1 quadrillion, respectively?

[mawilson 2,133]

US public pensions face a shortfall of $2,500 billion that will force state and local governments to sell assets and make deep cuts to services, according to the former chairman of New Jersey’s pension fund.

Shouldn't they cut the pensions instead?

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Shouldn't they cut the pensions instead?

In NJ, cops and firefighters already have about 9% of their salary deducted pre-tax and put towards their pension. I see that pension as part of the contract cops and firefighters agreed to in exchange for their service. Cutting pensions of people who have put money into the system is simply not ethical. I would rather see a transition to a defined contribution retirement plan for all future employees.

[mawilson 2,133]

Cutting pensions of people who have put money into the system is simply not ethical.

Agreed, but it's also unethical to expect ten dollars in benefits for each dollar paid into the system.

[alienlovechild 75]

Although Mr Kramer said some local governments would experience “severe strain”, he did not foresee mass defaults.

“I don’t assume that you will have that level of defaults just because there are various remedies, including asset sales, that you can engage before you have to default,” he said.

Expect governmental services to cut in addition to cuts from lower revenues and higher taxes to help out the pensioners.

Future pensioners are going to get less sweeter deals.