Public Pension Time Bomb

Malcolm A. Kline, August 24, 2011

Academic economists rarely fret over who will pay for public employee pensions, perhaps because many of them get them and most of us pay, quite a bit, into them. “Missing in the discussion has been an analysis of the revenue demands of the pension promises to public employees,” Robert Novy-Marx and Joshua D. Rauh write in a paper for the National Bureau of Economic Research.

Those demands are quite considerable, Novy-Marx and Rauh discovered. “We calculate the increases in state and local revenues required to achieve full funding of state and local pension systems in the U.S. over the next 30 years,” Novy-Marx and Rauh wrote. “Without policy changes, contributions to these systems would have to immediately increase by a factor of 2.5, reaching 14.2% of the total own-revenue generated by state and local governments (taxes, fees and charges).”

“This represents a tax increase of $1,398 per U.S. household per year, above and beyond revenue generated by expected economic growth.” Moreover, some states are more expensive than others.

“In thirteen states the necessary increases are more than $1,500 per household per year, and in five states they are more than $2,000 per household per year,” Novy-Marx and Rauh state. “Shifting all new employees onto defined contribution plans and Social Security still leaves required increases at an average of $1,223 per household.”

“Even with a hard freeze of all benefits at today’s levels, contributions still have to rise by more than $800 per U.S. household to achieve full funding in 30 years.” Yet and still, Americans are already paying a heavy price tag for public pensions.