New Estimate Shows Public Pension Shortfall Ballooning to $4.4 Trillion

Creative Commons License photo credit: emsphotonut41

Joshua Rauh just blogged on “Everything Finance” a new estimate of the current unfunded public pension liability for both state and local governments:

Using June 2009 data, Robert Novy-Marx and I measured a $3.1 trillion gap in state and local pension systems, arising from $2.3 trillion in assets and $5.4 trillion in liabilities.

Since then, the situation has evolved in several ways. First of all, the stock market continued to recover from the financial crisis . . .

More importantly, the true financial value of the liabilities that have been promised have grown substantially due to much lower bond yields . . .

the total unfunded liability is $4.4 trillion.

And folks are wondering why consumers aren’t spending?! Until policymakers come up with definitive solutions to these massive unfunded liabilities (that don’t involve raising taxes), then the uncertainty it creates will force consumers to pay down their own debt (or save) and restrain consumption.

These are structural issues that can not be fixed by monetary policy actions from the Federal Reserve. Ironically, as pointed out by Rauh, loose monetary policy is worsening the situation by keeping interest rates low and ballooning these unfunded liabilities. The Fed needs to stop babying politicians with cheap money and let them take their Castor Oil (via higher interest rates).