Public pension systems and Social Security were built decades ago, under very different economic and demographic conditions. Alas, our political institutions are lousy at modernizing the system—even when ruin is just around the corner. A few quick fun facts:
Public Pensions
Andrew G. Biggs (American Enterprise Institute) reports that state and local pensions systems aren’t just woefully underfunded; they’ve also come to pose much graver risks to state and local budgets.
First, pension assets are now about 143% of state and local outlays, up from 49% in 1975. Thus, it’s become three times more expensive for legislatures to amortize funds in down years. Note, in passing, that the system are no better funded than they used to be. Rather, they have “matured.” In the 1970s, there were 4.5 public employees per retiree. Now, the number is 1.75, and falling. Would the last public employee please turn off the lights? Thank you.
Second, as returns in the bond markets have evaporated, pension funds have turned to far riskier investments. Increased volatility means increased risk to state and local budgets. All told, Andy Biggs estimates that the pension risk has increased tenfold over the past four decades.
Social Security
Since 2010, Social Security has been running a sizeable cash-flow deficit, and it will continue to do so from here to eternity. The deficit is covered from a “trust fund,” consisting of something like $2.7 trillion in special-issue Treasury bonds. That money was credited to Social Security in years when the fund ran a surplus, plus interest. When Social Security runs a deficit, Treasury redeems bonds in sufficient amounts and sends the money along. As most everyone knows, this technical account is very misleading: the $2.7 trillion has long been spent; so we’re really talking about new debt. But there you have it.
What happens, though, when the so-called trust fund (or funds—there are two of them, for old age and disability) run out? According to current CBO projections, that will happen around 2031. (It could be sooner—e.g., if something bad happens to the economy.) What then?
What won’t happen is that Social Security stops cutting checks altogether. It will keep collecting payroll taxes and benefit taxes. That will suffice to pay around 77% of benefits. (For details see here.) What of the rest, though?
It can’t be paid. That’s because the Antideficiency Act (codified in here relevant part at 31 U.S.C. 1341) prohibits the expenditure of money that Congress hasn’t appropriated. So, come to think of it, does the Constitution. That’s what the fictional “trust fund” actually does: it obviates the need to appropriate funds on an annual basis.
We have immunized Social Security from ordinary budget processes to create a sense of—well, security. For the same reason, public pensions enjoy extraordinary legal and (state) constitutional protection. That’s a perfectly sensible social objective. Still: in contemplation of the numbers and the state of our institutions, maybe we should be a bit more nervous.
Michael:
No problem!
The feds already have a fix in mind. See below in todays Forbes:
http://www.forbes.com/sites/realspin/2013/12/23/financial-repression-from-the-obama-administration-how-savers-may-be-forced-to-buy-federal-debt/
take care
and merry Christmas
gabe
Public employee pensions on a State or local basis must be funded by taxes or bond issues that are paid for with tax receipts. Therefore there is only a certain amount of sustainability built into these myriad retirement schemes. If the money isn’t there,say in a bankrupt city like Detroit, then reductions or changes must occur or the whole system would collapse. It is different with the Federal Government in that,through the Federal Reserve money creation scheme plus the Income Taxes that can be taken,by force, from the economic class, the Federal Government can create all the funds it needs to sustain chain letters such as Social Security. Of course with all the money printing productive Americans,especially the savers in society, are penalized with the inflation tax. In essence,without an Income Tax and without a Central Banking fiat money creation scheme the American Welfare State would be an impossibility.