Tomorrow we may know whether New Jersey has to come up with another $1.6 billion to put into the state’s retirement system for this budget year and the Associated Press (AP) just released a story that will likely be picked up nationally summarizing the situation.
I would not call it sloppy reporting since I see this mindset everywhere and it has morphed into perceived wisdom but it does point up the difficulty of coping with the public pension crisis in this country when so many of the main players (politicians, participants, media, unions, and the public) are ignorant of the facts even as they pretend to lay them out:
One of the signature achievements of Gov. Chris Christie’s first term in office was working out a plan for pensions. In 2011, the state agreed to pay enough over seven years of escalating contributions to make up for past funding deficiencies.
This is in line with a general feeling that if New Jersey is forced to make that $1.6 billion deposit all will be right with the world. The truth is:
- $1.6 billion is less than two months of payouts currently going out of the plans.
- The 2011 law set a schedule (in 1/7th intervals) by which the state would be deliberately INCREASING the underfunding by the portion of the Annual Required Contributions (ARC) that is NOT deposited.
- The ARC amounts themselves are not to be believed. Funding methods and assumptions that develop these mini-payment ‘requirements’ are actuarially dishonest, especially in an underfunded plan, and would lead to bankruptcy eventually even if the ARC were religiously deposited.
People want to believe that there are easy solutions like:
- Make the $1.6 billion deposit
- Stick to the 2011 funding schedule
- Quadruple your money by investing in Jessica Alba
And so that is what you hear while the real solutions:
- Start putting in $15 billion a year, or
- Cut benefit payouts for everybody by 80%, then
- Allow only Defined Contribution plans where politicians are involved
are too inconvenient to get an airing.