Public Pension Panic
Missouri’s public pensions are in trouble. However, you might not have known that if you just reviewed official reports. Andrew Biggs’ new policy study for the Show-Me Institute illustrates just how much the state’s public pensions are truly in the hole. According to Biggs, Missouri’s total unfunded liabilities for its five largest public pensions is nearly $54 billion. This amount is close to five times higher than the officially reported sum of $11.1 billion.
The reason for the large discrepancy between Biggs’ numbers and those of the state’s pensions is the discount rate. A discount rate is basically compound interest working in reverse. If, for instance, I owed someone $10,000 five years from now, the discount rate tells me how much I would need to invest to ensure I can make that payment. The higher the rate, the lower the amount I need to invest.
The state’s public pension plans use discount rates between 7.25-8.25 percent. This enables them to assume their current assets will be worth more in order to pay off their liabilities. Biggs uses a lower rate that better accounts for the risks inherent in a portfolio with risky assets and guaranteed liabilities.
We, as taxpayers, are responsible for these obligations. If the state does not have enough money in these pensions to make the necessary payments to beneficiaries, it will have to resort to massive tax increases and/or deep cuts to services. The first thing the state should do to prevent this from happening is shift our public pensions to a defined contribution plan. This would prevent any new liabilities from accruing and give the state breathing room so that it can deal with its existing liabilities.
Missouri’s public pensions might appear to be relatively healthy to the casual observer. However, there is something rotten in the state of Missouri. Its public pensions are seriously underfunded and changes need to be made today. We cannot afford to wait.