Government Pension Plans Are Headed For Disaster

Tyler Durden's picture

Submitted by Robert Fellner via The Mises Institute,

The combined debt held by U.S. public pension plans will top $1.7 trillion next year, according to a just-released report from Moody’s Investors Services.

This “pension tsunami” has already forced towns like Stockton, California and Detroit, Michigan into bankruptcy. Perhaps no government mismanaged their pension as badly as Puerto Rico, where a $43 billion pension debt forced the commonwealth to seek protection from the federal government after having defaulted on its obligations to bondholders — a default which is expected to spread to retirees in the form of benefit cuts.

While the disastrous outcome of Puerto Rico’s pension plan — which is projected to completely run out of assets by 2019 — represents the worst-case scenario, the same series of events that led to its demise can be found in most public pension plans nationwide.

There are three primary culprits that can be found in nearly every state suffering from a public pension crisis:

  1. The use of accounting gimmicks that are designed to shift costs onto future generations — an approach outlawed for private pension plans and rejected by both public and private plans in Canada and Europe.
  2. Lawmakers, acting in their political self-interest, who have catered to the past demands of government unions to enrich their members’ benefits while passing the costs onto future generations.
  3. A broken governance structure where public pension board members are actually penalized in tangible ways for acting responsibly, and are rewarded by choosing to delay the day of reckoning.

Perhaps the most concise assessment of public pensions came from the former chief actuary for the nation’s largest public pension fund — CalPERS — who noted simply that: “Politics and pensions just don’t mix.”

And it’s not just "liberal" states like California who have succumbed to the siren call of public pensions. My home state of Nevada — historically thought to be a bastion of limited government thought — is in a proportionally deeper hole than our California neighbors!


The Trouble in Nevada 

While most financial experts are warning of future teacher shortages, decaying roads, higher taxes and cuts to public safety, the Public Employees’ Retirement System of Nevada (PERS) is confident they can avoid all that by doing one simple thing: produce investment returns higher than what even Warren Buffett expects to get! 

Because PERS has failed to hit its investment targets over the past 5-, 10-, 15-, 20- and 25-year periods, government workers’ retirement costs have soared to today’s record-high 28 percent of pay (40.5 percent for police and fire officers) — which now consumes more than 12 percent of all Nevada state and local government tax revenue combined.

And as more money is sent to PERS, less is available for salaries, like the only $34,684 offered to new Clark County school teachers last year — almost certainly a driving factor behind the district’s perennial teacher shortages. 

What’s worse, over 40 percent of what all government workers — excluding police and fire officers — pay towards PERS is spent on the system’s previously accrued debt, rather than on financing the employee’s future benefits.

Consequently, all new hires are expected to be net losers under PERS — receiving a benefit worth less than its total cost — which, unsurprisingly, will “negatively affect current teacher quality and retention,” according to scholars at the Bureau of Labor and Statistics.

Retirement costs for police and fire officers are even higher: Paying PERS an amount equal to 40.5 percent of their salary means fewer cops on the street. 

The Las Vegas Metropolitan Police Department, for example, has sat on roughly $100 million in funds explicitly designated for hiring new cops for over a decade now — likely anticipating the future explosion in retirement costs to come. In fact, despite the surplus, Metro is pushing for yet another tax hike, citing their ever-increasing personnel costs.

But that was just the tip of the iceberg.

PERS debt is projected to explode over the next decade, rising from roughly $11.4 billion to over $38 billion if the average 5.85 percent annual investment return forecast of the consultant hired by PERS — Wilshire Associates — is accurate:

To put that in perspective, in 2013 Nevada spent less than $3 billion on police, highways, and fire protection combined.

Servicing a debt of this size would require similarly massive increases in contribution rates, inevitably requiring lower wages for government workers, cuts to vital services, and higher taxes. 

At that point, it’s likely that there would simply not be enough taxes to hike and services to cut to make PERS solvent — leaving no other choice but to cut the benefits promised to retirees.

In order to avoid that fate, and save PERS, Nevada lawmakers must act with the urgency that this situation demands.

How We Got Here

PERS is different from retirement accounts in the private sector, where workers’ contributions are deposited directly into individually owned accounts.

In PERS, workers’ retirement contributions are all pooled together in one large fund, with members promised a fixed future benefit based on salary and work experience — similar to how Social Security works. 

Consequently, PERS must make a series of projections to determine how much workers must contribute in order to ensure their promised, future benefit is fully funded. One of the most significant projections PERS makes is its assumed 8 percent annual investment return.

In other words, PERS would consider a $10 payment due in 30 years as fully funded with only $1 today — as the expected gains from investing that $1 would bridge that $9 gap over time.

Unfortunately, if PERS investments underperform that target, taxpayers and government workers must bail them out via higher contribution rates.

But using expected investment returns to discount guaranteed future benefits amounts to serious malpractice, which is why such an approach is rejected by private US pension plans, public and private plans in Canada and Europe, and 98 percent of financial economists. US public pension plans are the only dissenters from this consensus.

The easiest way to see why this is wrong is to look at what happens by raising that rate. Imagine if the governor and the legislature uniformly demanded the PERS board must immediately pay down the approximately $11 billion unfunded liability it currently reports.

That sounds like an impossible task, right?

But because of the flawed PERS accounting methodology, the board could appear to pay off that entire amount in an instant. All that would be needed is for the PERS investment advisor to claim that instead of an 8 percent annual return, he now believes PERS can return 10.5 percent.

Presto! PERS would have eliminated their entire $11 billion debt, and would actually enjoy a slight surplus to boot!

Of course, their actual unfunded liability — over $50 billion using correct accounting — hasn’t changed.

If that approach sounds fishy to you, you’re in good company. 

But given that this is the approach PERS board members employ, they should be extremely vigilant in ensuring their assumed investment return is one that they can confidently expect to hit.

Instead, they ignore both their poor past performance, as well as the projections of their own, hand-picked consultants who are warning that the board’s assumed annual rate of return is far too high.

After a careful selection process, PERS last year commissioned a second-opinion review by Wilshire Associates, which, on August 20, 2015, informed the Board that it was most likely to realize only an average annual return of 5.85 percent over the next decade — not the 8 percent minimum PERS must hit to avoid falling further into debt.

Wilshire’s assessment of lower expected future returns is shared by virtually all major industry experts.

The McKinsey Global Institute, for example, warned that, “After an era of stellar performance, investment returns are likely to come back down to earth over the next 20 years.” Based on McKinsey’s projections, PERS can expect a 20-year return ranging from as low as 4.6 percent under a “slow-growth” recovery to as high as 7.4 percent under a “growth-recovery” scenario.

Even investing guru Warren Buffett uses a mere 6.5 percent assumed long-term rate of return for Berkshire Hathaway’s pension plan.

Because of this, most US public pension plans are now lowering their investment targets. For example, the nation’s largest public pension plan — CalPERS — implemented a plan last year to gradually drop their 7.5 target to 6.5 percent over the next several years.

A Broken Governance Structure

So why does PERS — in defiance of its peers, experts, and its own consultants — continue to employ an 8 percent assumed rate of return?

Political self-interest.

After PERS investment advisor Ken Lambert offered a few half-hearted reasons to justify dismissing the Wilshire report — the Board asked for a precise calculation of what lowering its rate to 7 percent would entail.

Such a move would increase the non-safety contribution rate from 28 to 38 percent of pay, at which point, according to Lambert, “We’ll all go home” — apparently predicting massive rebellion by public employees that would drive the current board and its staff out of office.

PERS here illustrates the core error built into the governance structure of US public pension plans: Short-term board members, with no skin in the game, face a set of incentives where they are actually punished for doing the right thing, and benefit from pushing costs off onto future generations.

Given that understanding, it’s easy to see why PERS characterized the Wilshire report as meriting “no rush, no real urgency” and containing “nothing [that] is actionable,” when Nevada State Education Association president Ruben Murillo repeatedly, and correctly, pressed the board for answers.

PERS now finds itself in a Catch-22 situation: Because board members have for so long failed to face reality, costs will skyrocket if they should now adopt correct assumptions. Yet, failing to do so will only compound their initial mistake — and the resultant carnage — when the day of reckoning finally arrives.

Significantly, because PERS only has about 72 cents of every dollar of promised benefits on hand, the system actually needs to outperform its 8 percent investment target. Only then would the system have enough money to make good on its promises.

Making matters worse is the fact that PERS is now cash-flow negative — paying out more in benefits than it collects in taxpayer and employee contributions. 

If this trend persists and Wilshire’s projected investment returns are realized, PERS could easily find itself approaching a funded ratio of only 50 percent — which is considered a “crisis-point” that is “very difficult to climb out of,” by CalPERS Chief Investment Officer Ted Eliopoulos.

Even though the call for reform enjoys widespread, bipartisan support and includes at least one former PERS board member, Warren Buffett’s assessment of public pensions still rings sadly true in Nevada:

There probably is more managerial ignorance on pension costs than any other cost item of remotely similar magnitude. And, as will become so expensively clear to citizens in future decades, there has been even greater electorate ignorance of governmental pension costs.

Thankfully, there is still time left to save PERS, but the particulars of reform are much less important than acknowledging the fundamental problems. As officials with Oregon’s pension plan stated of their similar crisis: “This is becoming a moral issue. We can’t just talk about numbers anymore.”


In theory, government is ostensibly designed to override the allegedly short-sighted, greedy nature of individual actors with policies that are long-term oriented and designed to maximize the general welfare.

Yet, as the case of public pensions (not to mention infrastructure spending, the national debt, entitlements, etc.) reveals, the political process actually does the exact opposite: it actually rewards those who underfund the present and defray costs onto future generations.

Thus, asking for lawmakers to “be more responsible” or “think about the future” misses the point. We are all self-interested actors. Instead of wishing this wasn’t so, it would be vastly more effective to embrace this reality and restrict the role of government to only those areas that it is well-equipped to provide.

As Ron Seeling said, “Politics and pensions just don’t mix. That’s all there is to it.”

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1980XLS's picture

Janet will just print MOAR. No worries.


Cognitive Dissonance's picture

I'm old enough to remember the good old days (60's and 70's) when (local, state and Fed) government workers were underpaid, but had a great benefit package to make up for the poor pay.

The good old days.

LowerSlowerDelaware_LSD's picture
LowerSlowerDelaware_LSD (not verified) Cognitive Dissonance Nov 3, 2016 7:52 PM

Just keep raising taxes...

The tax payers can always have thousands MORE taken from their retirements to give to the wealthy gubmint, as young as 40 to 50 year old, "retirees."

Soon enough it will all come crumbling down.

Shemp 4 Victory's picture

Nevada has an easy way to fix this: just go to a Vegas roulette table and bet the whole pension fund on green (0 and 00). The payout of 17 to 1 will take care of everything.

yippee kiyay's picture
yippee kiyay (not verified) Shemp 4 Victory Nov 3, 2016 10:10 PM

The whole country is headed for disaster.

beauticelli's picture
beauticelli (not verified) yippee kiyay Nov 3, 2016 10:11 PM

Just finished my bunker.

philipat's picture

SPAM ALERT: Serial spammer DO NOT click on his fake links which are completely unconnected to his comment.Current names: Yippee Kiyay, lonnng, letsit, Mano-A-Mano and techies-r-us.
Previous names include: mofio, santafe, Aristotle of Greece,  Gargoyle, bleu, oops, lance-a-lot, Loftie, toro.

nmewn's picture

Now they are paid more than the average taxpayer makes, with money they don't have amid promises they knew would never be kept.

King Tut's picture
King Tut (not verified) nmewn Nov 3, 2016 8:13 PM

Our lily-white suburb of 15K in IL has a couple of Operators Union retards($30/hr+benis) whose job in the fall is to drive around for 8 hours a day vacuuming up leaves that people have raked to the curb. Why the village can't hand out free landscape waste bags and let Waste Management haul it away is beyond me. 

HRH of Aquitaine's picture
HRH of Aquitaine (not verified) King Tut Nov 3, 2016 8:39 PM

OH they will. Once they run out of your money.

directaction's picture

Why can't the lazy obese fat-ass crackers stuff the leaves into biodegradable bags ... or compost them? 

King Tut's picture
King Tut (not verified) directaction Nov 3, 2016 10:17 PM

Would cut into time spent watching games played w/ a ball on the TeeVee 

Bay Area Guy's picture

Cog:  Just to get your dander up, I looked up a story I remember from some time ago, 2010 to be exact.  San Francisco had about 800,000 residents in those days.  But they had 27,000 employees (I believe it's up to about 34,000 now).  In 2010, 1 out of every three employees made a salary of over $100K.  Add in the primo benefits on top of that and you're easily talking $150K in annual costs per employee.  And that was six years ago.  My guess is that now, probably over half of the employees make over $100K and benefits are even better.

HRH of Aquitaine's picture
HRH of Aquitaine (not verified) Bay Area Guy Nov 3, 2016 8:47 PM

Your info doesn't surprise me.

Quote from the above article: "PERS is different from retirement accounts in the private sector, where workers’ contributions are deposited directly into individually owned accounts.
In PERS, workers’ retirement contributions are all pooled together in one large fund, with members promised a fixed future benefit based on salary and work experience — similar to how Social Security works. "

You would think that people employed by the government would understand how socialism and collectivism have worked, in the past. (The answer? Not very well. In the present? Look no further than Venezuela).

The people that rake in real cash are the people that package and sell and manage these accounts. They don't give a fuck if anyone actually collects any money in 30 or 40 years. They have already been compensated.

When you manage your own money you care about it. When government employees are told that they will be rewarded with huge pensions for C- and D-grade level work the alarm bells ought to be ringing. They will not be rewarded. They will be shafted.

I have known this was coming for many years. Which is why I would never be a public employee unless I created my own fucking retirement plan outside of the system. Anyone depending on the system to take care of them is going to be screwed, without lube. Time for people to wake the fuck up and take responsibility for their financial future. There is no fairy godmother that waves a magic wand and makes your life perfect. Especially not the fucking government.

Yen Cross's picture

  Good comment Cog. I remember very well how the private sector was well paid vs ,gov.  That whole shitshow blew apart in the nineties.

 The national education/indoctriation system is a prime example!   Socialisms work until you run out of other peoples monies<

 China and Russia are creating a new SWIFT alternative, and CL[oil dollars are DONE]  The days of petro-dollar recycling are ending.

HRH of Aquitaine's picture
HRH of Aquitaine (not verified) Yen Cross Nov 3, 2016 8:49 PM

That system is called CIPS: Chinese Interbank Payment System.

silverer's picture

And in the US, it means "Cuts Into Pensioners Salaries". The dollar is on the way out. They'll make great wallpaper, very durable and washable.

leeteam's picture

California government employees salaries and pensions.

Overpaid and retire with their full salary or more with benefits. Salaries go up automatically, every year based on the cost of living, even when there is no increase in cost of living.

Look up salaries or pension by name or position:

Lets Buy The Dip's picture

i kept thinking just buy the dip. Its a bit more complex with the stock market it seems.

Some very accurate people are putting out some very SCARY and shocking predicitons. 

David stockman, who is very accruate with the stock market, says a HUGE CRASH is coming..... See Here ==>

that is just one. :-0

OregonGrown's picture
"Government Pension Plans Are Headed For Disaster"


I just have one thought ........    HAAAAHAAAAAHAHAHHAAAHAHAHA

Zarbo's picture

Put the Clinton Foundation in charge of management.

Shemp 4 Victory's picture


Put the Clinton Foundation in charge of management.

See, now my idea of betting it all at the roulette wheel is looking even better.

booboo's picture

.gov employees are starting to see the light and bailing early so they can at least sop up some gravey before the train jumps the tracks, another 1.5% increase for another 5 years of fucking off just ain't worth it.

King Tut's picture
King Tut (not verified) booboo Nov 3, 2016 7:53 PM

Public employee unions should be banned.Cops, firefighters and teachers making more yearly in retirement for 30 or 40 years than they ever did while working for 20 to 25.

HRH of Aquitaine's picture
HRH of Aquitaine (not verified) King Tut Nov 3, 2016 11:10 PM

Amen. The only people with good medical benefits at your local VA hospital are the employees. Why? Because they are protected by one of the strongest unions in the country: the Federal Employees Union. They are not there to serve veterans. That union, and the VA, have one purpose: to serve VA employees. The VA is where C- and D-grade people go to get a job. Yes, there are some excellent doctors and staff. Few and far between.

welostyourgold's picture

I am part of the problem.  I am 50, started collecting a pension from NYC Bd of Ed. two years ago.  Never worked a day in my life for them.  I am collecting on my Mother's TDA.  I get $1,500+/month, for the REST OF MY LIFE.  Not to metion UFT garanteed 8+% a year, since the mid 70's.  Keep working suckahs! -wlyg

Not My Real Name's picture

In three years, that $1500/month will buy you a dinner at Chili's -- if you're lucky.

Problem fixed. Suckah!

leeteam's picture

California government employees salaries and pensions.

Overpaid and retire with their full salary or more with benefits. Salaries go up automatically, every year based on the cost of living, even when there is no increase in cost of living.

Look up salaries or pension by name or position:

King Tut's picture
King Tut (not verified) Nov 3, 2016 7:47 PM

6.5-8%? More like 2-3%

inosent's picture

you are being too generous. the real number is like -5%.

nmewn's picture

More good nuuuz ;-)

artichoke's picture

"Such a move would increase the non-safety contribution rate from 28 to 38 percent of pay, at which point, according to Lambert, “We’ll all go home” — apparently predicting massive rebellion by public employees that would drive the current board and its staff out of office."

They've offered to quit and renounce future salary and pension growth?  Do it!  Start over with cheaper, better employees on a defined contribution pension scheme.

These pensions are ridiculous.  We need some sort of law to prevent the debt being assumed by larger entities like states or the federal government.  Don't bail out the cities!  Let those entities die, let the pensions not be paid -- the same as happens to private sector employees whose companies fail or simply decided to renege on their pension promises.

We have to stop regarding public employee contracts and pensions as such solemn promises.  There shouldn't be public employee unions anyway.

Talleyrand's picture

I never promised nobody nothin'. So the fat lazy government fucks can ES&D. Solemnly, of course.

inosent's picture

ppl will just have to die sooner. the jews will have that law passed (exempting them) and everything will be ok.


King Tut's picture
King Tut (not verified) inosent Nov 3, 2016 8:01 PM

maybe a Goyim Holohoax?

inosent's picture

Goyim Holocaust II. Never Forget! the 100,000,000 goys who were given their early ticket to paradise circa 1900-1960 thanks to the supreme (((overlords))).

tarabel's picture



Or a Nazi wetdream.

I mean, I really don't understand these constant efforts from you guys to discount the number of people the Nazis murdered in their little pan-continental crime spree.

Whether it is 3 million or 6 or 50 or just eleven people grand total, the truth is that YOU THINK THEY DIDN'T KILL ENOUGH OF THEM, no matter how many it was.

And you look forward to finishing the job in the near future.

That doesn't make you the Good Guys in the White Hats.

It makes you the moral equivalent of the very people and movements you complain mightily against.

You say they are plotting o exterminate you.

Clearly, you are plotting to exterminate them.

Po-ta-to, po-tah-to.

A lot of blood is going to be shed in the near future and it pains me that anybody is looking forward to the idea. Especially with the belief that their cause is just and destined to succeed, and they personally will no doubt be amply rewarded with the abandoned goods of those evil people who have been most happily wiped out. A very big surprise awaits you.

The confirmed unteachability of human nature rolls on.

apocalypticbrother's picture

What most here believe that there are very serious questions surrounding the Holocaust story. And criminals should be prosecuted.

Graph's picture

You may have a point, but....

AIPAC, ....carnage what Israel is doing daily presented as "misunderstanding", ...obvious (and do not tell me it is not) use of US power to run Israel's agenda...

Just anywhere where power matters: politics, finace (line of FED chairs) and law is saturated with ..mans,...ergs, ...itzs, which directly props / intermingles with mentioned.

Even in the world of music, with obvious talent present, one's first thought is a fable "cricket and ants".


Have to admit that in this election, I am suprised on bit toned down cosher show of watching presidentail candidates bend over in trying to outdo each other in support for Israel.

Omen IV's picture

Massive real estate debacle - property taxes are a moon shot - will not be sustainable

King Tut's picture
King Tut (not verified) Omen IV Nov 3, 2016 8:04 PM

Part of the reason .gov stepped in to put a false bottom in housing after 2008 was so state/county/municipalities didn't have to suffer a ball-crushing loss of property tax revenue from lowered assessments

W.M. Worry's picture

Typically, assessments don't have anything to do with revenue only how the tax bill is apportioned among the residents. They vote on a budget then divide it by the total assessed valuation and that gives you your rate.  If the assessed valuation goes down, the rate goes up and vice versa.

Seasmoke's picture

The public takers with 12-15 years on the ponzi pyramid scam have to be getting very very nervous that their older comrades are going to get the rest of the pie before they do. Ha Ha.

leeteam's picture

California government employees salaries and pensions.

Overpaid and retire with their full salary or more with benefits. Salaries go up automatically, every year based on the cost of living, even when there is no increase in cost of living.

Look up salaries or pension by name or position:

pitz's picture

Some really nutty numbers on there.  Nurses at $200k+.  $230k+ cops.  Crazy.

I am Jobe's picture

Time for homewoners to support socialism. Increase in property taxes should solve the problem. 

silverer's picture

Absolutely. They can conveniently take it right out of the pensions.

Publicus's picture

Just print money, problem solved.