California Economics: $500B Pension Debt

Currently, governments discount pension values by using the return they expect their pension investments to earn over the long term. For most public pension funds, that means about 8 percent.

The researchers wrote that in today’s economic climate, such rates are associated with more speculative securities that carry some degree of risk, like those of emerging markets. Pensions, by contrast, are constitutionally protected and therefore the payments to public employees and retirees should carry almost no risk.

After the researchers applied a risk-free rate of 4.14 percent, equivalent to the yield on a 10-year Treasury note, the present value of the promised benefits ballooned. The researchers came up with a $425 billion shortfall for the three funds.

As of July 1, 2008, the funds officially reported they were $55 billion short. They have not issued financial statements since then, but have said informally that they lost a total of $110 billion.

The researchers concluded that their estimate of the gap would also have grown by roughly $110 billion, to more than half a trillion, today.

See Analysis of California Pensions Finds Half-Trillion-Dollar Gap by Mary Williams Walsh, April 6, 2010, and Going For Broke: Reforming California’s Public Employee Pension Systems by Howard Bornstein, et al, April 2010.