James Pethokoukis

Some scary numbers from new research by finance professors Robert Novy-Marx of the University of Chicago and Joshua Rauh, Associate Professor of Northwestern University in Evanston, Illinois.

We begin this article by discussing the true economic funding of state public pension plans. Using market-based discount rates that reflect the risk profile of the pension liabilities, we calculate that the present value of the already-promised pension liabilities of the 50 U.S. states amount to $5.17 trillion, assuming that states cannot default on pension benefits that workers have already earned. Net of the $1.94 trillion in assets, these pensions are underfunded by $3.23 trillion. This “pension debt” dwarfs the states’ publicly traded debt of $0.94 trillion. We show that even before the market collapse of 2008, the system was economically severely underfunded, even though public actuarial reports presented the plans’ funding status in a more favorable light. While we take no stand regarding the optimal amount of state government debt, we do believe it is important to point out that total state debt with pension liabilities included is actually almost 4.5 times the value of outstanding state bonds.