New Jersey’s pension liabilities are increasing, with official actuary reports compiled for the state’s pension board showing the public retirement fund debt grew by 13 percent between June 2013 and July 2014.
Each New Jersey taxpayer is now liable for more than $12,500 in debt since the state’s funds can only pay 51 cents toward each dollar promised to public sector retirees.
As bad as the state’s pension problem appears, Mercatus Institute Senior Research Fellow Eileen Norcross argues New Jersey’s problem is even worse than reported.
“New Jersey’s unfunded pension liability is much larger than the state estimates,” Norcross said. “On a market basis, it is closer to $135 billion. This discrepancy is due to a mistaken assumption that the U.S. government uses when calculating the present value of pension liabilities due in the future.”
Inaccurate Discount Rates
Norcross says public sector plans fudge numbers to make funds appear to be better situated than they actually are.
“To figure out what a pension benefit due in the future is worth in today’s dollars … you need to assume a rate of interest to ‘back out’ or reverse compound interest,” Norcross said. “Public sector plans in the United States choose that interest rate based on what they expect the pension plan’s assets will return when invested in a portfolio of risky assets. That expected rate of return on the assets is, on average, between 7.5 percent and 8 percent.
“When valuing public pensions using a lower discount rate, based on the bond yield in the 3 percent range, the present value of these liabilities gets large and the annual contribution needed to fund the system increases,” Norcross said.
As a result, pension plans can become underfunded even without excess liabilities, Norcross says.
“Even where plans make 100 percent of their annual contribution, that amount is insufficient to fully fund the system,” Norcross said. “The funding of a riskless liability is matched to a risky and uncertain portfolio of assets, producing funding gaps in the right circumstances.”
Funding Gap Dwarfs Revenues
Rachel Greszler, senior policy analyst for economics and entitlements at The Heritage Foundation, says although economists may disagree on the exact size of New Jersey’s pension problem, it’s definitely huge.
“Under the [Governmental Accounting Standards Board] standards, New Jersey’s pension debt is $87 billion,” Greszler said. “And according to some financial economists, it’s over $100 billion. New Jersey’s gross state product is about $510 billion, so unfunded pension debt is approaching 20 percent of the state’s gross state product, according to some financial economists.”
Greszler says the state’s pension funding gap dwarfs its annual tax revenue.
“New Jersey’s estimated tax revenues for 2014 are $31.2 billion, so the state’s unfunded liabilities are close to three times its annual tax revenues,” Greszler said. “If New Jersey fully funded both its pensions and retiree healthcare, it would consume almost 25 percent of the state budget.”
Greater Employee Contributions Needed
Greszler says New Jersey can solve its looming problem with a few simple changes.
“To the extent possible, as allowed by the state court’s interpretation of New Jersey’s contractual pension obligations, [the state should] increase contribution rates for current employees,” Greszler said. “This is not only necessary to fund their own pensions, but increased contributions will be needed to offset the reduction in contributions from ending pensions for new hires.”
Matt Hurley ([email protected]) writes from Cincinnati, Ohio.