The Day After Tomorrow: The Political Economy of Public

Employee Retirement Benefits

D. Roderick KiewietCalifornia Institute of

Technology

June 5, 2012

Institutions in Context: Dictatorship and Democracy

University of Tampere

Some Recent News Items

162,400 government jobs cut in 2011

City of Highland Park, Michigan removed 1000 of its 1200 street lights

Caltech sells $350 million of 100-year taxable bonds at 4.7%

State and local government unfunded pension liabilities increase by 50% last year alone

State and Local Government:Revenues and Expenditures

Employee Pensions and State and Local Government Finances

1. Unfunded liabilities are large and growing rapidly. ( $1.5 trillion) Virtually all OPPEB’s such as medical care, are unfunded.

2. “Stimulus” transfers from the federal government have ended.

3. State and local governments have very little ability to raise additional tax revenue.

4. State and local government pension funds have been increasingly “gambling for redemption” by investing in riskier assets.

5. Many cities now allocate one third of their budget to retirement contributions. By the end of the decade this share will rise to over one half.

Employee Pensions and State and Local Government Finances

(continued)

6. Public employees’ contributions to their retirement funds are increasing rapidly.

7. State and local governments have reduced their work force and will continue to do so.

8. Debt service currently accounts for half of Nevada’s entire budget and 40% of Michigan’s.

9. Medicaid costs, which already account for more than 20% of state spending will continue to grow much faster than state revenues

Pension Underfunding: How Did We Get Here?

Wagner’s Law Niskanen’s Law Demographics Morgan’s Law Ledyard’s Law

Social Security and Medicare Costs as a Percentage of GDP

OA SI, DI, and HI Trust Fund Ratios(Assets as a percentage of annual cost)

Ratio of Covered Workers to Beneficiaries

1950-2050

1950 16:5 1960 5:1 1970 3:7 1980 3:2 1990 3:4 2000 3:4 2010 2:9 2020 2:5 2030 2:2 2040 2:1 2050 2:1