Back to top

Josh Rauh Warns Why Taxpayers Will Have to Bail Out Public Pensions

Next
Share

Comment

Published: January 3, 2019

Pension promises are increasingly consuming state and local budgets. In order to fund pensions, state and local governments are making risky investments in the hopes that high returns will pay future benefits. However, when the investments do not do well, taxpayers have to pick up the tab.  

This video’s audio is excerpted from Joshua Rauh’s 2017 Hoover Institution Summer Policy Boot Camp lecture. 

The Hoover Institution’s Summer Policy Boot Camp an intensive, one-week residential immersion program in the essentials of today’s national and international United States policy for upperclassmen and recent graduates. To learn more, click here.

Additional Resources

  • Watch the five-part animated video series based on Josh Rauh’s research on the vast underestimation of public pension liability to gain insight into the hidden debts the next generation will face, available here.
  • In “Hidden Debt, Hidden Deficits: 2017 Edition,” Joshua D. Rauh details the issues surrounding the pension system and the role of governments in increasing liabilities and deficits by means of their pension system. Available here.
  • In “A Tale of Six Cities: Underfunded Retiree Health Care,” Rauh and Pozen analyze the retiree health care systems of six American cities: Boston, Minneapolis, Pittsburgh, San Francisco, San Antonia, and Tampa, Florida. They also outline a broad variety of reasonable measures that cities could adopt to materially reduce their long-term OPEB liabilities. Available here.
  • “The Public Pension Crisis” is an essay excerpted from a new Hoover report by Joshua Rauh, “Hidden Debt, Hidden Deficits: How Pension Promises Are Consuming State and Local Budgets.” The full report may be read here.
View Transcript

A pension is a promise to pay an employee a pre-specified amount, like a bond. 

If the state invests and doesn’t do well, you’re the ones to pick up the tab. 

Let’s assume that your investments will grow at 7.5% per year. This means your money will more than double every 10 years. How likely is it that 7.5% will be achieved? 

There’s an approximately 25% chance of this happening over the next 30 years. Models say, “It’s not that it’s impossible. It’s just not that likely.” 

The state and local governments are preparing their budgetary statements under an assumption that a future will come true that is only about 25% likely. 

I don’t think it’s appropriate to claim that you’re running a balanced budget when there’s only a 25% chance of the outcome occurring. 

Your officials should tell you that, but they’re not telling you you’re doing that. They’re saying, “Based on historical stock market returns, if we get this again, then we might be okay.” 

You are personally writing trillions of dollars of insurance that the stock market won’t go down. You’re doing it on behalf of your state and local government.