The question of our time, continued

Here is a recent interview with economist Veronique de Rugy, discussing the tremendous increase in unfunded pension liabilities that state governments in the US have racked up in recent decades.

Dr. de Rugy presents evidence that the problem is much larger than many states are willing to admit, in part because state accountants are projecting that the asset pools they have set aside to pay those benefits will gain average investment returns of 8% per year every year, which may be an overly optimistic assumption.

She also presents evidence that underfunding of these asset pools (which occurs when state governments do not invest in their pension savings at a level that will support the amounts that they have promised to give out in future years to their retired government employees) is largely due to the fact that states were spending the revenues that they were supposed to be saving, rather than being due to major bear markets in 2000-2002 or 2008-2009.

Many who defend the unaffordable government pension system like to claim that everything would have been fine if it hadn't been for these market corrections, but the facts simply do not support that argument. Also, it is contradictory for defenders of these pensions to use assumptions of steady 8% annual returns when calculating the size of the unfunded liability problem, and then to turn around and blame market corrections for creating the enormous unfunded liabilities that they now face.

We have called this issue "The question of our time" in previous blog posts. The good news is that the world seems to be waking up to the problem. Many of the most egregious increases to state-employee retirement benefits were enacted in the late 1990s, such as California's 1999 legislation that allowed many public workers to retire at 50 and draw 90% of their salary for the rest of their lives, along with cost-of-living adjustments (which were made retroactive for those already retired as well, as described in this article).

We have also argued that the most important concept to understand in this whole discussion is the role of economic growth in solving government budget problems (see here and here). This is why it is so important that government does not create obstacles to economic growth, through high taxes, intrusive regulation, or capricious monetary policy.

Investors are well-advised to monitor such obstacles and be alert when they are on the rise (we have written about how to do that, and thoughts about how to invest when they are on the rise, in previous posts such as this one and this one). For this reason, we applaud Dr. de Rugy's efforts to provide good analysis on this important subject.

Subscribe (no cost) to receive new posts from the Taylor Frigon Advisor via email -- click here.

For later posts on this same subject, see also: