State by state, county by county, city by city, we hear and read about the problems of underfunding of the nation’s pension plans. We don’t hear much about the potential threat that pension liabilities pose to the entire U.S. economic structure. When the dam finally breaks, every city, county and state will be flooded with a rush of liabilities that easily could suck America’s financial structure out to sea.
A brief survey of newspaper articles from around the country frames the scope of the problem. Spending a little time on the “Pension Tsunami” Web site gives a sense of the scale of the nation’s unfunded and underfunded pension obligations. The following are just two examples.
» The Motley Fool on April 27, “State Pension Problems,” observed that the Centre Daily Times in State College, Pa., noted: “The figure is a moving target. But in a March presentation to a state House panel, the state’s two large public-sector pension plans estimated that the $821 million a year they currently get in ‘employer contributions’ — the vast majority of it from taxpayers — will need to grow to $5.7 billion a year by 2012. … Even more frightening is that those numbers involve assumptions that could be overly optimistic.”
» The Star-Ledger in Newark, N.J., on April 26, “Scary Numbers on the N.J. Pension Plan” by John Bury, noted: “… There is about $58 billion left in the plan, per the investment people. As of July 1, 2008, there were 243,877 retirees getting benefits of $6.22 billion. A year earlier, there were 235,346 retirees getting benefits of $5.78 billion. … Assuming the same percentage increase over the next five years, there will be $43 billion paid out in benefits.”
According to the National Debt Clock, as of May 12, the outstanding public debt was more than $11 trillion. “The estimated population of the United States is 306,169,145, so each citizen’s share of this debt is $36,821.06. The National Debt has continued to increase an average of $3.83 billion per day since Sept. 28, 2007.”
As bad as that may be, it doesn’t include the underfunded pension liabilities of the 50 states, more than 3,000 counties and thousands of municipal governments around the country. In addition, there are unknown billions of dollars of unfunded or underfunded pension obligations lurking behind the balance sheets of the nation’s industrial giants. Think about the pension liabilities in just the airline and automobile manufacturing industries.
The Wall Street Journal reported in April 2005: “The Pension Benefit Guaranty Corp. was created by Congress in 1974 to insure defined-benefit pension plans — those that provide workers with a monthly check based on wages and years on the job — after a campaign that began when 4,000 Studebaker-Packard Corp. workers were left without pensions when the automaker shut in 1963. … Last year, the agency said it had $62.3 billion in long-term obligations to pay workers, but only $39 billion in assets, a gap of $23.3 billion.”
So far, the agency has taken over the pension plans of 141 steel companies, which were underfunded by $10.2 billion, and 12 airlines, which were underfunded by $5.2 billion. The agency said it expects to assume a further $6.4 billion from UAL Corp.‘s United Airlines. Overall, the Labor Department estimated that underfunding of pension plans increased by almost $300 billion from 2001 to 2005.
As John Morris recently noted in his blog, “The above figures only give a clue as to federal liabilities, but cities, states, county governments have trillions in surprise obligations. Officials had a fiduciary duty to estimate the costs of future benefit promises and account for them honestly, but in state after state this was not done.”
It’s undoubtedly not possible to tally up the total of all unfunded or underfunded pension liabilities in the United States, but it surely must add up to many trillions of dollars over and above the Social Security and Medicare obligations, which the Peter G. Peterson Foundation recently reported totaled about $56 trillion.
As Morris noted, “Underfunding on this scale is the result of far more than a few mistakes or a few bad years in the markets.”
When the inevitable finally happens, the federal government will try to bail everyone out with loans and/or grants, which may work in the short term. However, ultimately, it can have only one result: increased inflation. Coupled with the excess government spending that already has occurred, the long-term consequence is very likely to be runaway or hyperinflation.
Historically, irresponsible fiscal management has always led to financial disaster, and this time will be no exception.
— Harris R. Sherline is a retired CPA and former chairman and CEO of Santa Ynez Valley Hospital who has lived in Santa Barbara County for more than 30 years. He stays active writing opinion columns and his blog, Opinionfest.com.