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One More Thing to Worry About: Underfunded Public Pensions

If there is one thing that politicians love to do it’s to promise people things now and not worry about how we will pay for those promises until sometime far into the future, when some other politician is on the hook to balance the budget. 

We see this all the time in the form of budget deficits in the federal government, and also with the accounting tricks used on the Social Security Trust Fund.

These sorts of shenanigans get less press at the state and local level because many state and local governments are required to have balanced budgets (this paper by my thesis adviser Jim Poterba lays out some of the details).  There are, of course, ways for states to get around the balanced-budget provisions.  The method that currently casts the greatest shadow over the future is underfunded pensions.  State governments promise generous retirement packages to state employees, but use accounting tricks to avoid recognizing the full value of what taxpayers will owe in the future to cover those debts.

So how big is this hidden burden?  In a new paper, economists Robert Novy-Marx and Josh Rauh try to figure it out.  Their conclusion: Covering the shortfall due to underfunded state and local pensions would require an average increase in taxes of $1,365 per year for every taxpayer.

This is not the biggest number ever – I actually would have guessed the number would be larger – but it is definitely something to complain about.  If you’ve never thought about unfunded public pensions, then what you’ve discovered is that if you are the average taxpayer, you should think of yourself as being $1,365 per year poorer than you thought you were just a few minutes ago.

That is one expensive blog post.