Pension Tsunami

John McCain came up with a great phrase when he used the term Generational Theft to describe what our government has done.



The above figures only give a clue as to federal liabilities, but cities, states, county governments have trillions in surprise obligations. Officials had a fiduciary duty to estimate the costs of future benefit promises and account for them honestly but in state after state this was not done.

"Actuaries should be able to tell what a promised pension benefit would cost. But if they come up with too big of a number those benefits might not be provided which is bad for the government workers who won't get those benefits and bad for the government officials who will need to come up with some remuneration scheme that they won't be able to defer onto future taxpayers.

In New Jersey benefits were increased across the board for all retirees and active participants by 9% in 2001 which led, along with the Whitman-instituted contribution holidays, to the current decrepit funded status of the plan.

Were I the actuary for the New Jersey plan, I wouldn't be releasing pro forma reports based on assumptions dictated to me by politicians. To avoid getting sued my executive summary would look something like this:

Without significant cash infusions the benefits promised under this plan are unsupportable and the forced liquidation of assets will mean that within five years little more than the employees' own contributions will remain in the plan to fund all benefits. This pension plan will then morph into a true ponzi scheme. Assuming no significant benefit changes the Annual Required Contribution should be at least at $10 billion for 2009 (from the current $4 billion) and increase with inflation.
Maybe this year's annual report* will have some variation of this wording included (on advice of Milliman's and Buck's counsel) but I doubt it. Telling New Jersey officials what they've been avoiding might not get you sued, but it could get you fired. That's why they keep quiet about it."

The site, Pension Tsunami gives one some idea of the scale of generational theft that has gone on. Underfunding, on this scale is the result of far more than a few mistakes or a few bad years in the markets.