Andrew Biggs had a piece in Forbes where he made the point:
Overall, state and local governments dedicated just 4.1% of their spending to pension contributions in 2013. The reality, though, is that if state and local governments were truly fully funding their pensions – that is, merely following the rules that the federal government requires for corporate pensions – their annual contributions would make up over 20% of total state and local government spending.
But contributions made by governments are not a good measure of what is being accrued in benefits since:
- a major part of the Annual Required Contribution (ARC) for most governments (New Jersey being in the forefront) consists of paying off unfunded liabilities generally over 30 years (over and over again),
- member contributions offset the ARC, and
- many governments (New Jersey being in the forefront) do not, being broke, pay the full ARC.
All of which makes projecting the true cost of these benefits using reasonable assumptions problematic. One would need to go to the actuarial reports and pull out the contribution exhibits – which is what I did with the New Jersey reports – and come up with a spreadsheet that yields this data:
- 442,827 active participants with an average salary of $60,738
- $3 billion annual cost ($6,775 per participant) which is offset by $2 billion that the employees put in
- $5.2 billion being the amortization payment means that a 7.9% interest rate and a 30 year repayment period puts the unfunded liability at $60 billion
and these observations:
- $6,775 for a comparatively generous defined benefit plan is ridiculous. That’s IRA contribution territory. The real cost is in the $15,000 range per active participant which translates into a total cost for annual accruals of about $7 billion.
- Not making the ARC (plus accrued interest) over the years ($15 billion and counting during the Christie interregnum alone) would explain how part of that $60 billion underfunding developed but what about the rest of it? Could it be bad actuarial assumptions?
- It is and it’s continuing.