There was a time when a soaring stock market and zero percent interest rates, leading to soaring values of existing fixed-income investments, would have been enough to pull state and local government public employee pension funds out of the hole, at least by the (in my view false) measures used. Today, however, that hole is so deep that for all state and local government pension funds in the U.S. combined, according to my estimate, later-born generations face a $3.5 trillion debt to pay for public employee pensions as of FY 2016, or 21.8% of the personal income of everyone in the United States. Over and above any pension benefits that are being earned today. That exceeded the $3 trillion in formal state and local government bonded debt at the time.
More and more, various organizations are coming up with estimates of this combined debt burden, trying to predict which states and localities will be headed for bankruptcy, public service insolvency, or both. Having pioneered this way of thinking nearly a decade ago with the first “Sold Out Future” ranking, let’s continue the analysis with regard to public employee pensions.
All across the country, despite an economy that has been officially out of recession for half a decade and record stock prices, Americans are being subjected to one round of state and local government tax increases and/or public service and benefit cuts after another. In many cases the pay and benefits of younger and future public employees has been slashed, and in a few cases even existing employees and retirees have also been hit with reductions in retirement benefits. The reason is the soaring cost of public employee pensions, but that cost should not be soaring at all.
Most public employees are promised a set of retirement benefits when they are hired, in exchange for choosing a public service career, and those benefits are supposed to be paid for gradually over the years when each employee is working. At first the politicians and public employees unions blamed the post 2000 and 2008 stock market crashes, following stock market bubbles, for the harm they were imposing the rest of us. But now that the zero interest rate policies of the Federal Reserve have inflated another bubble, they are silent.
The fact is U.S. state and local governments are facing a public employee pension disaster not because of the ups and downs of the stock market, but because of thefts by older generations through retroactive pension increases, spiking and fraud, and taxpayer underfunding of the pensions public employees had been promised to begin with, which is the equivalent of wage theft. The extent of the problem, and the distribution of guilt between public employee unions and past taxpayers, varies from state to state. This post will use Census of Governments data to show who has robbed the future from younger generations, to what extent, with regard to public employee pensions.
Note: This analysis has been updated with four more years of data. Read the updated analysis instead of this one. It is here.