Public Pension Crisis Reaching a Tipping Point

The following is a summary of our FS Insider podcast with Lawrence McQuillan (see Day of Reckoning for Public Pensions Underway) which can be accessed on our site here or on iTunes here.
With several states and local governments across the country facing insurmountable public pension obligations, and a few cities having already declared bankruptcy to cope with the problem, it’s becoming increasingly clear that the current system is unsustainable and will have to change.
Lawrence McQuillan, a senior fellow at the Independent Institute and author of the book California Dreaming: Lessons on How to Resolve America’s Public Pension Crisis, explains why this is a crisis, how we got to this point, and the reforms that are needed.

Is It Safe to Call It a Crisis?

The short answer is, yes, we’re likely at the beginning of a crisis. From a national perspective, all state and local government pension debt amount to $4.7 trillion, McQuillan stated.
“This is money that should be in the bank today, but isn’t, in order to pay for pension benefits that have already been earned,” he said.

Though contributions have increased in recent years to make up for the shortfall, public pension liabilities are still climbing at a much faster rate and are unlikely to be reversed even under the most rosiest scenarios, notes Bloomberg based on a recent study by Moody’s:
The optimistic “best case” of cumulative 25% investment return would reduce net pension liabilities by just 1% through 2019 year-end because of past bad investment returns and weak contributions. Meanwhile, the “base case” scenario of 19% returns would see net pension liabilities rise by 15%.