Public Pension Time Bomb

, Malcolm A. Kline, Leave a comment

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.


“Total government contributions including Social Security contributions amounted to

$110.9 billion, and excluding Social Security contributions were $80.7 billion,” Novy-Marx and Rauh claim. “The Social Security contributions comprise 4.5% of aggregate payroll, suggesting a Social Security coverage ratio of around 73% of payroll.”


“Equally weighted across the 50 states, total government contributions average 16.4% of payroll, 9.1% of tax revenue, 5.7% of total own revenue, and 0.8% of GSP[Gross State Product]. The average per household government contribution to DB pension systems plus Social Security at the state level is $941.” Thus, the $1,000-2,000 families can expect to pay comes on top of an annual price tag that already comes close to a thousand dollars.


To add insult to injury, private pensions are nowhere near as flush as government ones. Novy-Marx teaches at the University of Rochester and Rauh at Northwestern. The National Bureau of Economic Research is housed at Harvard.


Malcolm A. Kline is the Executive Director of Accuracy in Academia.

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