US public pension gap at least $2 trillion: Moody's


This is not about Social Security and Medicare, which have their own serious problems.

This is about state and local pensions that have been underfunded for many years because of unrealistic and unkept promises to government workers. Some jurisdictions like Illinois tried to solve the problem with the stroke of a pen–they just assumed higher investment returns in the future. Even with the rebound from the 2008-2009 financial crisis, the actual returns were not nearly enough. Another bear market, which will eventually happen, will mean a huge crisis and more municipal bankruptcies, ala Detroit. With current interest rates near zero from Federal Reserve policy, there will be huge losses in pension funds bond portfolios when rates return to normal.

If you are expecting to retire on a state or municipal pension, you may have little time left to save on your own for retirement in an IRA or other arrangement, even if that means cutting back on some of the things you enjoy, like that bigger house or fancy vacation. Because many states have a constitutional guarantee on pension benefits, they cannot be wiped out in a bankruptcy. Taxes will be raised and other services will be drastically cut. We may see a lot of current teachers, police, and fire fighters layed off in order to pay retirees, who have a higher priority claim on revenues.


Pensions are not sustainable any more. They need to pay those with whom they made an agreement with, and change the system and eliminate pensions going forward for the new employees.

One option that is not acceptable: a federal bail out. If you voted for politicians in your state who had no financial sense, and made promises they could not keep, then that is your problem.


Federal bailouts are always wrong. They don´t work. God bless:thumbsup::thumbsup::thumbsup:


I am a state worker who is actually in a defined contribution plan. The nice thing about that is that I don’t have to worry about the state backing out on its promises since every time I get paid it must make it’s contribution and once it has made its contribution they can’t take it back. The other good part of defined contribution plans from the state’s point of view is that it is harder for the workers to game the system. For example, in some states police officers are used to direct traffic on construction projects. The people close to retirement take all the extra work they can get in order to pad their pensions.


They actually work very nicely for those that get them, not so good for those who have to pay for them. Consider the bank bailouts, the CEOs and the shareholders made out like bandits, the taxpayers were the one who were robbed.


They should have realized this in 2007 when Bernanke started cutting rates from 5% all the way down to 0% by Dec 2008. Did anyone really expect rates to be lifted one iota after a banking crisis, massive unemployment, and continuing stock market pressures?

Anyone holding reserves — insurance companies, pensions, savers, and yes, even some diocese — suffers loss of interest income unless they’re willing to take on huge risks into the future.


No politician wants to deal with the fiscal issues. It is easier to promise something that will have to be fulfilled by others down the road.

The artificial lowering of interest rates plays into the lowered returns. Elected officials predicted what, even then, were oddly high expected rates of return.

People who have saved all their lives now have no returns on their savings. At one time, the elderly were famous for clipping interest coupons to fund retirement. There are now no returns to enjoy. That means people are going to consume their savings. Money that once would have earned an income stream now goes for living expenses. It also means that retirement funds are not immune from going bust.

It makes the stock market the only game in town for getting any returns. That entails risk and that’s not good for the elderly who don’t have time to average returns.


Well, the top 1% did capture 93% of the income gains last year. The bottom 80%, those people with an income under $101K per year, saw a 1.7% decline in income on average. So, it looks like pensioners are on track to a poor retirement. Why should we rock the boat, as long as the rich are getting richer, and our democracy is being destroyed by money and corruption at the top?


Boy, I miss turbo tax Tim and Uncle Ben. I reminded invested and survived the financial meltdown and the flash crash of 2010. Just stay invested and play with the big boys. It remains to be seen with Speed Bump Yellen.


Income disparity is a bigger issue than pension shortages, to be sure. For many, this latter issue may just mean longer work careers to adjust for shortages. Our own pension is sort of pay as you go. Contributions are made as they are earned and the pension is paid out upon retirement based on actuary tables. One only loses future income based on the constantly shifting tables, what with life expectancy increasing.


You must belong to a pension then which has adjusted to the low interest rate environment. But since compounding is virtually eliminated, that required paying more into it and perhaps longer to do it, no?

As for the rich, not that I’m defending them but they were eating their shirts back in 2008. But they sure got Uncle Ben and now Aunt Janet watching out for them. Forget income when there’s capital gains to be made.


Changing interest rates doesn’t affect interest income. A bond is a contract and it has a stated fixed rate of return (unless it is an indexed bond but those are not very common). The current interest rate could increase 1,000x but it wont change the payments that a bond issuer has to make.

What will change is the bond’s current market value. But, if you aren’t intending to sell the bond, the market value is meaningless. All you care about is the fact that the issuing company/group can continue to make their interest payments. In fact, with rates going up, companies will do everything they can to maintain bonds at low rates, because they are dirt cheap. If they fail to pay on the 2% bond they issue now, they will have to borrow the money from someone else later and pay 8%.

Insurance companies, pensions, (and I would guess most large dioceses) weren’t badly affected (in terms of income) from rates being dropped. They have massive bond portfolios with different maturity dates. They don’t renew the whole thing at once. They have bonds that are 20+ years old and are still collecting payments.


If you have a portfolio of short term bonds then you will lose income when the bond matures and it is time to reinvest the money. Many elderly have money in short term CDs and they saw a significant decrease in their interest income.


State regulators and others require insurance companies and the like to hold the reserves in higher quality and usually short-term bonds, if not CD’s. As more and more CD’s are maturing, there will be loss of income in converting to newer CD’s.

Even the high-yielding, long-term bonds have had a nice run of higher premiums effectively lowering the yields. They can sell them to realize the cap gains but where are they going to go with the proceeds?

Most look at employment income as being the controlling factor for the Fed. However, it is their very policy which has driven down the total income reported to the government of those not into the risks of going for capital gains.


Insurance companies invest in high quality bonds for sure, but the average duration of the bonds they hold (depending on what type of insurance [life, home/auto, health, etc]) is 6-12 years.


Maybe but those don’t compare to those nice 30-yr 12% returns on bonds issued during the Carter-Reagan years. (Bob Brinker thinks they should have never been issued so he would disagree with me.)

However, I think a constant 5% rate across the board would make life easier for the actuaries. Mortgage brokers would not be too happy with them, though.


The part in bold is the problem. It’s simply not possible to make the payments already promised. Changing the problem going forward will help, but the pension expenses for the baby boomers about to retire will bankrupt many state and local govts unless the pensions are wildly slashed.


Right. And this is only exacerbated by cost-of-living increases higher than the stated inflation rate. Even at 3%, this is easily doubled in 24 years. And given that some of those can retire at 55, it is conceivable that many will live to collect it, if not more.


You are right about that, but the states have fewer options than the feds have with Social Security.

  1. In many states, pensions are contractual obligations guaranteed by state constitutions. They cannot cut benefits already earned. Social Security is not a contractual obligation, but a politician who voted to cut benefits for current recipients would soon need another job. This actually has happened already in Greece, and we are headed that way.

  2. The feds can print their own money, but the states cannot. During the Great Depression my grandfather worked for the City of Chicago. The city could not meet current payrolls and paid in scrip. It was not real money; scrip is an IOU. Some merchants accepted it at a discount, hoping that they could eventually redeem it at face value. Interestingly, you could not pay your taxes with this scrip. The city knew its real value.

  3. Because so many payments into the pension system have been skipped or delayed in order to balance the current budgets, the pension managers lack the capital to earn the returns required to pay promised benefits. Simply promising better investment returns in the future have been a total fraud on the public. If a private company did this, prison sentences would result for the managers.

  4. Pension plans cannot invest solely for the long term, which would result in higher investment returns. Many of these plans earned a 7% return last year when the stock market gained 30%. They have to maintain liquidity because they are making current benefit payments. Not only are current returns from fixed income investments very low because of Federal Reserve policy, some of those old higher rate bonds will have to be sold to pay benefits. It is really difficult to make up for all the unkept promises in the past. The longer tax hikes or budget cuts are delayed, the worse the damage to the economy will be when courts impose them to satisfy the pension obligations.


That’s what happens when you have short-term politicians entering into long-term contracts.

The Fed Chairperson does no better with QE long-term bond purchasing. Doesn’t have to deal with maturing bonds to such an extent. But the consequences are severe if interest rates don’t at least cover the inflation rate plus a couple of points, which historically they’ve done.

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