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While media and investor attention has been totally focused on the market meltdown, the funded status – or lack thereof, of public employee pension plans has been escaping attention. And attention there should be, because it affects all of us taxpayers in our respective states.

And it’s one of those complicated issues that the mainstream media won’t or can’ t seem to get their hands around and heads into. t I wrote about it last August in my post, Dilbert (and others) on public employee pension funding,  In that post, I mentioned two bloggers who are right on top of this issue in their respective states:

  • Jack Dean writes about public employee plans in California. He edits Pension Watch. He also edits PensionTsunami.com, a project of FACT — the Fullerton Association of Concerned Taxpayers. FACT’s primary focus is on California’s public employee pensions and the state’s funding issues.
  • John Bury writes about New Jersey public employee plan in his blog, NJ Voices. John’s one of us. That is, he’s in the retirement plan business. He’s an Enrolled Actuary with his own firm in Montclair, New Jersey.

And while Jack and John are regular reads for me through my RSS reader, it was a recent study  that got my attention. Robert Novy-Marx and Joshua D. Rauh, both of the University of Chicago Graduate School of Business, co-authored the study for the National Bureau of Economic Research (NBER), The Intergenerational Transfer of Public Pension Promises (summary by Matt Nesvisky).  

Their study indicates that the extent to which public pensions are underfunded has been obscured by governmental accounting rules, which allow pension liabilities to be discounted at expected rates of return on pension assets. Specifically, their abstract says:

The value of pension promises already made by US state governments will grow to approximately $7.9 trillion in 15 years. We study investment strategies of state pension plans and estimate the distribution of future funding outcomes. We conservatively predict a 50% chance of aggregate underfunding greater than $750 billion and a 25% chance of at least $1.75 trillion (in 2005 dollars). Adjusting for risk, the true intergenerational transfer is substantially larger. Insuring both taxpayers against funding deficits and plan participants against benefit reductions would cost almost $2 trillion today, even though governments portray state pensions as almost fully funded.

Let me repeat the last sentence of the abstract again for emphasis: Insuring both taxpayers against funding deficits and plan participants against benefit reductions would cost almost $2 trillion today, even though governments portray state pensions as almost fully funded.

Hat tip to Dave Baker at BenefitsLink.

Picture above is oil on canvas, 54" x 76", by the artist Jung Hee Lee-Marles, who was born in Seoul, South Korea and now lives in Ottawa, Canada.