The bull market this week celebrated its seventh year, with $16 trillion in gains since 2009. Unfortunately, though, a seven-year bull market has not eased the burden for many public pension systems throughout the country. In fact, state and municipal public pensions remain woefully in debt at an estimated $4 trillion in unfunded liabilities.
Despite being a bullish market, investments have faced their share of ebbs and flows—especially recently. Analysis released earlier this year by the Nelson A. Rockefeller Institute of Government highlights how this affects public pensions. Since the vast majority of pension plans are built on risky holdings like stocks, hedge funds and real estate, investment shortfalls can greatly add to pension debt. This very scenario played out last July to September as investments tumbled, causing unfunded public pension liabilities to increase by $268 billion. According to the report, the increase represents 1.4 percent of U.S. gross domestic product, which “is the equivalent of 50 percent of all of the property taxes levied by all of the state and local governments in the nation in a single year, or of a full year of spending by all state and local governments on police, fire protection and corrections combined.”
If the steep cost that taxpayers are already paying is not alarming enough, picture what will happen if we are suddenly faced with a bear market. A state pension that is expecting an 8 percent return will instead be faced with a 20 percent loss. It would take 56 percent investment returns the following year to close this new 28 percent hole. Since such returns never happen, nor are they expected to, taxpayers are forced to shovel in even more money to fill the hole.
History shows that as government pension plans face insolvency, policymakers tend to increase taxes and/or pull funds from important public services like education, public safety and transportation to pay down pension debt. Further, over the past few years, taxpayer funded pension contributions to cover market losses have skyrocketed. If the market continues along its current trajectory, unfunded pension liabilities will only get worse, requiring more tax dollars to clean-up the mess.
So while a few investors this week may be celebrating their tremendous gains, there will be no fireworks, balloons or cake for many public pension holders whose hard-earned savings are at risk, nor for the taxpayers who have been left picking up the shortfall.