Sunday, September 19, 2010

Recently Introduced Actuarially Unsound Methods Hide Pension Mess in Illinois, Texas, Ohio; $3 Trillion Pension Deficit in Total

It's no secret that Illinois, New Jersey, and numerous other states have massively underfunded pension plans. The problem is far worse than it looks because of ridiculous assumptions like 8% or higher returns.

Moreover, states like Illinois, Texas, Rhode Island, and Ohio have gone one step further by recently adopting actuarially unsound methods specifically designed to disguise the mess.

The New York Times tackles the issue in The Illusion of Pension Savings http://www.nytimes.com/2010/09/18/busin ... ess&src=me

Earlier this year, Illinois said it had found a way to save billions of dollars. It would slash the pensions of workers it had not yet hired. The real-world savings would not materialize for decades, of course, but thanks to an actuarial trick, the state could start counting the savings this year and use it to help balance its budget.

Texas saved millions of dollars this year after raising its retirement age for future hires and barring them from counting unused sick leave in their pensions. More savings will appear in coming years. Rhode Island also raised its retirement age for future retirees last year, after being told it could save $90 million in the first year alone.

The technique is fairly innocuous in normal times, allowing governments to smooth out their labor costs over many years. But it becomes much riskier when pension funds have big shortfalls, when they need several decades to pay down their losses and when they are cutting benefits for future workers — precisely the conditions that exist today.

“In a plan that is not well funded, I wouldn’t recommend it,â€