Pension promises are increasingly consuming state and local budgets. In order to fund pensions, state and local governments are making risky investments in the hopes that high returns will pay future benefits. However, when the investments do not do well, taxpayers have to pick up the tab.

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This video’s audio is excerpted from Joshua Rauh’s 2017 Hoover Institution Summer Policy Boot Camp lecture.

Additional Resources:

Watch the five-part animated video series based on Josh Rauh’s research on the vast underestimation of public pension liability to gain insight into the hidden debts the next generation will face, available here

In “Hidden Debt, Hidden Deficits: 2017 Edition,” Joshua D. Rauh details the issues surrounding the pension system and the role of governments in increasing liabilities and deficits by means of their pension system. Available here:

In “A Tale of Six Cities: Underfunded Retiree Health Care,” Rauh and Pozen analyze the retiree health care systems of six American cities: Boston, Minneapolis, Pittsburgh, San Francisco, San Antonia, and Tampa, Florida. They also outline a broad variety of reasonable measures that cities could adopt to materially reduce their long-term OPEB liabilities. Available here:

“The Public Pension Crisis” is an essay excerpted from a new Hoover report by Joshua Rauh, “Hidden Debt, Hidden Deficits: How Pension Promises Are Consuming State and Local Budgets.” The full report may be read here:

In “Pension Fund Board Composition and Investment Performance: Evidence from Private Equity, “Andonov, Hochberg, and Rauh examine the governance of public pension funds and its relationship to investment performance. Availabe here:

In “A Few Trillion Short,” Rauh reveals the government debt owed to public employees, available here:

In “Unfunded Pension Debts of U.S. States Still Exceed $3 Trillion,” Raul explains the true magnitude of unfunded pension promises for the systems tracked by Pew is much larger. Available here:

In “Funding Retiree Healthcare Plans,” Robert Pozen and Rauh explain why the new accounting rules won’t cure the budgetary ills of state and local governments, available here:

In “Real Pension Reform: A California Design,” Joshua Rauh explains why California cannot be the leader of real pension reform, available here:

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Josh Rauh, a senior fellow at the Hoover Institution, has issued a warning that taxpayers may be on the hook for bailing out public pensions in the near future. In a recent policy brief, Rauh outlines the dire financial situation facing many state and local pension systems and offers a sobering assessment of the potential consequences for taxpayers.

According to Rauh, the main cause of the pension crisis is the persistent underfunding of these systems by state and local governments. He explains that many public pension funds have promised far more in retirement benefits than they can realistically afford to pay out, and they have not set aside enough money to cover these obligations. As a result, these pension funds now face significant shortfalls and are at risk of running out of money in the near future.

Rauh warns that if these pension funds become insolvent, taxpayers will likely be called upon to foot the bill. State and local governments do not have the resources to cover these pension shortfalls on their own, which means they may have to turn to taxpayers for financial assistance. This could take the form of higher taxes or cuts to public services in order to redirect funds to these struggling pension systems.

The consequences of a taxpayer bailout of public pensions could be far-reaching. It would place a significant burden on taxpayers, who would have to shoulder the costs of propping up these pension funds. This could reduce funding for other critical government services, such as education, infrastructure, and public safety. It could also lead to a decrease in economic growth as taxpayers have less disposable income to spend and invest.

Rauh’s warning comes at a time when many state and local governments are already facing budget challenges due to the economic impacts of the COVID-19 pandemic. These governments are grappling with declining revenues and increased spending needs, making it even more difficult for them to address the pension crisis on their own.

In light of these challenges, Rauh calls for urgent action to address the growing pension crisis. He recommends that state and local governments take steps to reform their pension systems, such as reducing benefit levels, increasing employee contributions, and implementing more realistic investment return assumptions. He also suggests that policymakers consider alternative funding mechanisms, such as issuing pension obligation bonds, to help shore up these struggling pension funds.

Rauh’s warning serves as a wake-up call for policymakers and taxpayers alike. The looming public pension crisis has the potential to have far-reaching implications for government finances and the economy, and it is imperative that action be taken to address this problem before it’s too late. By heeding Rauh’s advice and implementing reforms to shore up public pension systems, governments can avoid the need for a taxpayer bailout and ensure the long-term financial stability of these critical retirement funds.