The Teacher Pension Nightmare Josh Barro, Forbes, April 14, 2010
Why the trillion-dollar gap will become taxpayers' problem.
Pension and retirement plans all over America have lost value. Plans covering public school teachers, by their own admission, are underfunded by $332 billion. However, the plans' real funding gap is far worse than their financial statements show, at nearly a trillion dollars--and you and I will bear the burden of covering their shortfall.
The story of how this happened is familiar: States expanded their promises to retirees when times were good. Then, the economy tanked, pension assets fell in value and states skirted their obligations to deposit cash in pension funds--all causing a funding gap. But because benefits are contractually guaranteed, the obligation to cover any funding shortfall lies with taxpayers.
Actuaries are telling states and localities to cough up far higher payments out of current budgets to shore up the plans. In the education sphere these obligations are putting new pressure on local taxes and competing with funding for classroom instruction.
Unfortunately, an often overlooked aspect of the pension gap story makes matters even worse: Governments use accounting methods that have consistently understated pension funding gaps in both good times and bad. Examined on a more realistic basis, the true gap in teacher pensions is nearly three times the official amount--and the taxpayers who will have to close it are in for three times the pain.
Recently, Stuart Buck and I authored a paper for the Manhattan Institute and the Foundation for Educational Choice called "Underfunded Teacher Pension Plans: It's Worse Than You Think." We reestimated the unfunded liabilities of major teacher pension plans by applying private-sector-style accounting and marking asset values to market. We found that all the plans are underfunded, and the aggregate funding gap is $933 billion.
t's time for state lawmakers to say that if 401(k) plans are good enough for everybody else, they're good enough for teachers and other public employees too. Then, states (and taxpayers) can set about filling in the $933 billion funding gap that exists for teachers alone.
Josh Barro is the Walter B. Wriston Fellow at the Manhattan Institute for Policy Research. The report can be found here.