US public pensions face $2,000bn deficit
By Francesco Guerrera and Nicole Bullock in New York
www.ft.com
Published: January 4 2010 23:01 | Last updated: January 4 2010 23:01________________________
________________________
________________________
_______________
The US public pension system faces a higher-than-expected shortfall of more than $2,000bn that will increase pressure on many states’ strained finances and crimp economic growth, according to the chairman of New Jersey’s pension fund.
The estimate by Orin Kramer will fuel investors’ concerns over the deteriorating financial health of US states after the recession. “State and local governments are correctly perceived to be in serious difficulty,” Mr Kramer told the Financial Times.
EDITOR’S CHOICE
Opinion: A 10-year plan to close the budget deficit - Jan-04In depth: The pensions crisis - Jun-16Public pensions may stress US state finances - Nov-05California in $200m State Street legal action - Oct-21“If you factor in the reality of these unfunded promises, their deficits will rise exponentially.”
Estimates of aggregate funding requirement of the US pension system have ranged between $400bn and $500bn, but Mr Kramer’s analysis concluded that public funds would need to find more than $2,000bn to meet future pension obligations.
A shortfall of that size could force state governments to take unpalatable decisions such as pouring more public money into their funds or reducing pension benefits. State and local governments have already cut spending to close budget deficits.
The Pensions crisis
FT multimedia feature: The dilemmas faced by individual savers, companies and governments and offers potential solutions to the pensions time bomb
Mr Kramer, chairman of New Jersey’s investment council and also a senior partner at the hedge fund Boston Provident, warned that outdated accounting models and unrealistic expectations of future returns had led states to underestimate their pension requirements.
Public pension funds do not use mark-to-market accounting, relying instead on actuarial numbers that average out value of assets and liabilities over a number of years – a process known as “smoothing”. Mr Kramer’s analysis used the market value of the assets and liabilities of the top 25 public pension funds at the end of the year.
He also looked at market interest rates, which are used by corporate pension funds and are lower than the rate of return of about 8 per cent employed by public funds, to calculate future returns. Using the 8 per cent rate of return, the funding requirement of the US public pension system would still be about $1,000bn.Mr Kramer, a power broker in the Democratic party, criticised the financial metrics used by public funds and argued that his assumptions were more realistic.
“The accounting treatment of public retirement plans is the political leper colony of government accounting. It is a no-go zone,” he said.
Pension funds’ requirements are expected to compound the pressure on local finances. Thirty-six of the 50 US states, including California and New York, have plunged into budget deficits since fiscal year 2010 began, which for most states was July 1 2009, according to the National Conference of State Legislatures.
Copyright The Financial Times Limited 2010. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.
________________________
________________________
_____
There is no way out of our debt situation.
