To stimulate thought and awaken the intellect, let us begin with a riddle:
What does man cherish more than life;
Fear more than death or earthly conflict;
What the poor possess, the rich yearn for;
And what the satisfied long for;
What the miser hoards and the spendthrift saves,
And that which all carry to their graves?
Hint: The answer is not a tangible item.
Correct! The answer is “nothing.”
This riddle serves as a reminder that sometimes, nothing holds significant value. It raises a crucial point about the unrealistic expectation among some individuals of receiving something for nothing—a notion that is proving to be increasingly problematic.
For instance, recent findings revealed startling statistics indicating that public pension systems are burdened with enormous obligations that they cannot meet. According to Milliman, the top 100 public pension funds do not carry the reported unfunded liabilities of $895 billion; instead, they face an alarming shortfall of $1.193 trillion. Additionally, these funds are only 67.8% funded, leaving about 32.2% of their obligations to current and future retirees unfunded.
Tragically, some of the most egregious offenders are state pension funds.
How State Pension Funds Missed the Mark
Take the Illinois state pension fund, for example—it is a ticking time bomb. Only 45% of the state’s pension liabilities are funded, a shocking gap that raises questions about the governance of pension finances. 24/7 Wall St. provides insight into how this disparity arose:
“Every year, actuaries assess the contributions a state needs to make to keep its pensions adequately funded. Many states have, for various reasons, failed to contribute the full recommendations for 2010, while others have been compliant yet still face severe underfunding.”
“In discussions with 24/7 Wall St., David Draine, a senior researcher from the Pew Center on the States, detailed why some states remain significantly underfunded despite full contributions. ‘The 2000s have been a grim era for pension investments, often falling short of expectations, and this has exacerbated the funding gap,’ Draine noted.”
“Growth in unfunded liabilities can also stem from overly optimistic investment returns, deferred pension payments, increased benefits, or a rise in beneficiaries without a proportional increase in contributions,” Draine explained.
Essentially, Draine implies that the unfortunate reality is that not everyone can obtain something for nothing. Unfortunately, when projected investment returns fail to reach the expected 8%, creative and deceptive strategies emerge to bridge these financial chasms at the expense of everyday taxpayers.
Deceptive Schemes to Bailout Unfunded Public Pensions
In our own state of California, there is a concerning measure on the ballot this election cycle—Proposition 30. This initiative proposes to raise taxes on earnings exceeding $250,000, along with an increase in the sales tax, ostensibly to fund education and public safety. Proponents, including the governor, portray it as a crucial investment in the future of our children.
As a parent with a child currently enrolled in public school, I remain skeptical of this claim. Here’s why:
Proposition 30 does not actually ensure new funding for schools; rather, it operates more like a sleight of hand. It permits politicians to redirect existing funds allocated for education and use them for other purposes, subsequently compensating for the lost funding with the newly raised taxes.
Governor Jerry “Moonbeam” Brown is already planning to divert this revenue towards covering the pensions of retired educators.
As reported by the Wall Street Journal, “Governor Brown is attempting to sell his tax increase to voters by claiming it will benefit schools. The truth, however, is that these new revenues are essential to propping up the bankrupt teachers’ pension fund.”
“An actuarial report unveiled to the California State Teachers’ Retirement System asserts that pension contributions must rise by approximately 68% to address a staggering $65 billion unfunded liability over the next 30 years.”
“Given that state law dictates that half of all general fund tax income should go to education, schools stand to see a financial boost of $3 billion to $5 billion should this initiative pass. However, this influx of cash will not restore arts education, sports programs, or bus services.”
“Instead, schools will be forced to allocate these funds toward their pension obligations or to provide higher salaries to offset potential increased contributions that teachers may face toward retirement. The state may also boost its $1.2 billion annual contribution to the teachers’ pension fund, creating a situation where more of the new revenues are spent on retiree health benefits, all of which are escalating at a rapid pace.”
This situation exemplifies the unfortunate outcomes that arise when governments find themselves in financial dire straits. It is likely that similar deceptive tactics are being positioned in states across the nation. Politicians will resort to any means necessary to sustain this illusion.
Ultimately, we will all feel the repercussions of this mismanagement, and we may prefer expediting the process of holding them accountable sooner rather than later.
In conclusion, the complexities surrounding public pension funding and governmental accountability highlight the urgent need for transparent and responsible financial practices. The sooner we confront these issues, the better off we will all be.
Sincerely,
MN Gordon
for Economic Prism
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