2 Simple Charts Show Which State Pensions Are Most Likely To Enforce Benefit Cuts

2 Simple Charts Show Which State Pensions Are Most Likely To Enforce Benefit Cuts | Zero Hedge
"A new research note from Moody's found that State pension funds were underfunded by $1.3 trillion at the end of FY15 but was expected to grow to $1.8 trillion at the end of FY17 as pensions continue to struggle with low returns...

Per the following chart, many states have racked up over $20,000 of liabilities per capita, a level from which it will be very difficult to recover absent benefit cuts, massive tax hikes and/or a federal bailout.

Looking at pensions on a standalone basis, New Jersey, Illinois and Alaska remain the most at risk with underfunded liabilities equal to over $10,000 per person living in those states.  Meanwhile, only Wisconsin and South Dakota have fully funded plans.

But, as the CATO Institute points out, the pension crisis is likely much worse than what most auditor reports would suggest because discount rates of 7.4% are unreasonably high.  CATO estimates that reducing the discount rate from 7.4% to 2.7% would increase state pension underfunded liabilities from $1.2 trillion to $3.4 trillion. 

Pension shortfalls are actually larger than these figures indicate.  Those are the officially reported figures, but financial experts think that the discount rates used to report pension liabilities are too high.  Higher discount rates reduce reported liabilities and create an overly optimistic picture of pension plan health.

In his study, Rauh recalculated pension plan funding using a 2.7 percent discount rate, rather than the official average rate of 7.4 percent.  His    recalculated  unfunded  liability jumps from $1.2 trillion to $3.4 trillion.  Similarly, Munnell and Aubry found that their unfunded pension liabilities  jumped to $4.1 trillion if plans are estimated using a 4 percent discount rate.  Under that assumption, the funding level of state and local pension plans averages just 45 percent.

Unfortunately, the pension ponzi becomes more and more unsustainable each year with funds simply borrowing from future benefit payments, which are almost certainly impaired in many states, while paying current benefit recipients in full.  While these types of "kick the can down the road" games can be played for a long time, eventually the massive underfundings will have to be addressed...and that will not be a pretty day.