For those wondering why the Fed's third mandate is so critical, and is arguably about more than padding the brokerage accounts of those top 400 US "taxpayers" who account for 10% of capital gains, the Pew center brings what could be the main reason. Which is that even while factoring an 8% discount rate (for most states, some are probably higher), in other words expecting 8% gains in their assets, "the gap between the promises states made for employees’ retirement benefits and the money they set aside to pay for them grew to at least $1.26 trillion in fiscal year 2009, resulting in a 26 percent increase in one year." The difference is broken down as follows: "State pension plans represented slightly more than half of this shortfall, with $2.28 trillion stowed away to cover $2.94 trillion in long-term liabilities—leaving about a $660 billion gap, according to an analysis by the Pew Center on the States. Retiree health care and other benefits accounted for the remaining $604 billion, with assets totaling $31 billion to pay for $635 billion in liabilities." In other words, states have roughly 5 cents for every dollars in health benefits obligations. Good luck with funding that absent America becoming Weimar.
Some more from Pew:
The $1.26 trillion figure is based on states’ own actuarial assumptions. Most states use an 8 percent discount rate—the investment target that states expect to earn, on average, in future years. But there is significant debate among policy makers and experts about what discount rate is most appropriate for states to use when valuing pension liabilities. This is an important issue because, depending on how those liabilities are calculated, states’ total funding shortfall for their long-term pension obligations to public sector retirees could be as much as $1.8 trillion (using assumptions similar to corporate pensions) or $2.4 trillion (using a discount rate based on a 30-year Treasury bond). How states value long-term liabilities going forward will play an important role in defining the scale of their challenges and the actions they will have to take to meet them.
The Pew center's conclusion:
Far too many states are not responsibly managing the bill for their employees’ retirement.
Which is why the only resolution is for the Fed to recreate Weimar and to cause state asset holdings, which lately are probably shares of 3x beta stocks, in hopes that the state pension plan will not become the next "muni" scare.
And some charts:
Full report:Pew Pensions Retiree Benefits 1200bn Shortfall 2011
h/t John Poehling