Let Detroit’s Pension Problems Be An Example
People’s eyes often start to glaze over when we at the Show-Me Institute start talking about public employee pensions. Actuarial tables, discount rates, pension obligations . . . boring. Sure, pensions may not be as exciting as predicting the royal baby’s name (George Alexander Louis, in case you missed it), but the impact public pensions can have on our lives are much more pronounced. A clear example of this is coming out of the now-defunct Detroit, a once mighty city that recently filed bankruptcy.
Many things led to Detroit’s decline, but pension obligations are almost certainly what broke the bank in recent years. Policymakers in Saint Louis, Kansas City, and Jefferson City would be wise to heed Detroit’s warning. As Mary Williams Walsh recently wrote in an article titled “Detroit Gap Reveals Industry Dispute on Pension Math”:
It may sound arcane, but the stakes for the country run into the trillions of dollars. Depending on which side ultimately wins the argument, every state, city, county and school district may find out that, like Detroit, it has promised more to its retirees than it ever intended or disclosed. That does not mean all those places will declare bankruptcy, but many have more than likely promised their workers more than they can reasonably expect to deliver.
This is something we have been saying for some time. In a recent policy study, we noted that when an appropriate discount rate is used, Missouri’s big five public pension systems have more than $53.9 billion in unfunded liabilities. Pension fund managers downplayed our findings and said we were using unrealistic expectations. As Walsh notes, however, it may be the pension managers who are using the unrealistic expectations:
Much of the theoretical argument for retaining current methods is based on the belief that states and cities, unlike companies, cannot go out of business. That means public pension systems have an infinite investment horizon and can pull out of down markets if given enough time.
As Detroit has shown, that time can run out.
We need to learn from Detroit’s example and act before time runs out on our pension systems.
