Making Commitments We Haven't Paid For

Oregon is all a twitter over the state welfare agency being off $172 million in its budget estimates for the biennium. Editorialists are calling for a special session.

Although $172 million is not chump change, it pales in comparison with the annual fluctuations in the Unfunded Actuarial Liability (UAL) of Oregon's Public Employeement Retirement System (PERS). Oregon has created exceptionally expensive retirement programs for all public employees, local and county as well as state. It hasn't been paying enough into the program to cover liabilities, hence the huge UAL. This year, with assets of around $40 billion (last time I looked), the plan needed an 8% return to avoid falling behind. Based on the stock market indices, it probably earned about 2%. Being short 6% on $40 billion is $2.4 billion.

For PERS, 2005 was a lackluster year. The previous two had been good. The two that preceded those had been disastrous. Looking at NASDAQ, S&P 500 and Dow Industrial averages, the equity earnings over five years have been negative, so even including some bond revenue (30% of PERS assets), it's been about a wash. The actuarially assumed return of 8%, compounded for 5 years, would have been 47%.

Taxpayers have picked up the tab so far, but if the 8% can't be regularly achieved, this is a nightmare that will never end. It's the same all over the country, in both private and public sectors. Executives promise employees fixed payouts that are only possible if the modest funds paid in earn good returns, consistently, forever.

There's a very tidy logic behind the 401(K) strategy of pensions. People today, whether they are paying an autoworker to build a Chevy or a teacher to instruct first graders, include something for that person's pension. What it yields as retirement income depends on whether America prospers. We're all in the same boat.