Unfunded Time Bomb

Suppose there was a $1.3 trillion difference between your current assets and what you owe to others. Would you declare bankruptcy?

$1.3 trillion is roughly how much more 118 state public pension plans owe to their beneficiaries than they actually have on hand. In aggregate, those funds have about 75% of the money they’ve promised to current and future retired government workers.

You can go to a website calculator to see how much many of the state plans owe vs. how much they have in their investment accounts (https://reason.shinyapps.io/state_pension_projection_2022/), but you should be warned that this exercise might be depressing. Turn to the State Employees’ Retirement System of Illinois, for example, and you see a current $30 billion shortfall—or, looking at the situation the other way, about 60% of the promised benefits are unfunded. The California Public Employees Retirement Fund is sitting on a $160 billion shortfall, though it is roughly 70% funded at the moment.

Where is this leading? U.S. states cannot declare bankruptcy under federal law, and they are theoretically required to balance their budgets. The U.S. Constitution’s Contracts Clause bars states from breaching contracts with private citizens. More likely are potentially draconian cuts to state budgets in order to get the finances back in shape. What, exactly, that would entail, and how voters would respond, is an interesting question.

Sources:

https://smartasset.com/financial-advisor/state-bankruptcy