By: Mark Glennon*
The U.K.’s central bank was reported today to be considering expanding its stress tests to include pensions. Stress tests are done by central banks to gauge systemic threats to a nation’s economy under different scenarios.
Memo to Fed in case you’re considering same for U.S. public pensions (and we know you read WirePoints closely):
No need to bother. Calling it “stress” would be looking backward. It would be more like examining a Post Dramatic Stress Disorder victim at the morgue. We already know public pension unfunded liabilities exceed any Wall Street scam ever — over $4 trillion — if you measure them properly, as your economists unquestionably would.
Illinois alone has an unfunded state and local pension liability of roughly $450 billion, if measured the way any economist would. That’s if you use a risk-free rate of return assumption to do the accounting. It’s Finance 101 that doing so is appropriate for pensions, as two Nobel Prize winning economists have explained clearly. One of those Nobel Winners, Eugene Fama, said Illinois pension liabilities are probably three times the officially reported numbers. The most recently officially reported unfunded liability for state and local pension is $158 billion. Multiply that by three and you get over that $450 billion which, alone, is a terminal case of “stress.”
For the nation as a whole, economists have long been estimating total state and local pension liabilities at over $4 trillion, using proper return assumptions. Prof. Joshua Rauh, now at Stanford, made that estimate over four years ago. Current estimates go as high as $4.7 trillion just for state pensions.
Those numbers far exceed any previous Wall Street scam in history. The total subprime mortgage market was only about $1.1 trillion, and it was the biggest to date. Madoff scandal, just $65 billion. Enron, under $100 billion. S&L crash, about $125 billion. Pensions have all the same elements as typical financial scandals — phony accounting, lax government oversight, greed masquerading as populism, public ignorance and weak press coverage.
*Mark Glennon is founder of WirePoints. Opinions expressed are his own.