Teacher Pension Plans Could Trigger Next Big Bailout Crisis

Congress and the White House are ignoring a problem that could dwarf the big bank bailouts.

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By Peter Roff, Thomas Jefferson Street blog

The effort to rein in Wall Street and its excesses is, for the moment, stalled. With all 41 members of the Senate Republican Conference committed to opposing the Democratic leadership’s bill because it creates a permanent structure to bail out failed companies, the charges and counter charges are flying around fast and furious.

The GOP, the Democrats say, is in the pocket of the big banks. At the same time some Republicans suggest that Senate Democratic Leader Harry Reid went to New York to collect campaign contributions from high-rolling financiers at the same time he is trying to shepherd legislation through Congress to regulate their activities and more.

All of this, though, is akin to locking the barn door after the cow has been stolen, slaughtered and sold for hamburger. Neither the Democrats nor the Republicans wants to be seen as having contributed to the creation of the environment that produced the last crisis, so they are putting a lot of rhetorical energy into making any delay look like the other side's fault. At the same time, however, the congressional leadership and the White House are ignoring a potential problem that could dwarf the big bank bailout.

A study just released by the Foundation for Educational Choice and The Manhattan Institute identifies as an “emerging crisis” the underfunding of public teacher pension plans across all 50 states. In “Underfunded Teacher Pension Plans: Its Worse than You Think,” co-authors Josh Barro and Stuart Buck examine the discrepancy between what states report and the true value of underfunded liabilities for state teacher pensions.

In their examination of the data, Barro and Buck found that all 59 pension funds included in the study faced shortfalls. According to their own financial statements, total unfunded liabilities to teachers--i.e. the gap between existing plan assets and the present value of benefits accrued by plan participants--is $332 billion. But a conservative estimate of the situation produced by the authors of the study found the plans’ unfunded liabilities really total about $933 billion.

The authors of the study say that “only $116 billion of the $600 billion difference” can be attributed to the stock market decline that “precipitated the 2007 financial crisis.” According to their calculations, the Dow Jones Industrial Average would "have to nearly double overnight to make up for the present underfunding of these plans."

What many lawmakers miss is that, as has been the case so many times before, if any of them crash it would ultimately be up to the taxpayers to make up the difference. Which means another bailout.

There are ways to mitigate the damage. Barro and Buck recommend states consider shifting to defined contribution retirements plans like 401(k)'s and IRAs, especially for new and young employees, or at least adopt hybrid programs like those used for decades at public colleges and universities.

Either of these changes would be difficult to enact, given the power of the public employee unions--which would regard them as the leading wedge of an effort to change all public employee pension programs--but they are, a number of leading economists suggest, economically necessary. And the clock is ticking.

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