The Pension-Driven Budget Strain Relief Is Temporary
Speaker of the Rhode Island House of Representatives Gordon Fox (D, Providence) had an op-ed in the Providence Journal, yesterday, arguing on behalf of the state’s pension reform. Probably without intention, it’s clarifying about what the reform did:
… the enactment of reform enabled the state to dramatically reduce the taxpayer cost for the retirement system in our annual state budget. In the current fiscal year, the budget savings from general revenues and local sources amounted to more than $250 million.
As I pointed out in 2011, the reform only bought some time until the unfunded liability reaches crisis proportions again. It all comes down to the 7.5% rate of return on which the state relies; every year that it’s too low, it has to come in more than the same amount above 7.5% to make up for the compounding investments that weren’t achieved.
The returns came in high for the past year, but the stock market’s being inflated with scores of billions of dollars that the Federal Reserve is causing to magically appear in the investment markets every month. That can’t continue. When investment inflation turns into consumer inflation, that will help the pension returns seem higher, but Rhode Islanders will be less able to fund the government and pension checks won’t go as far.
And even so, the fund’s 10-year return is still below the 7.5%, meaning that the returns will have to be something like 8% for the next decade to catch up.
When we do reach crisis point again, two new problems will come into play: First, none of the money that the pension reform shuffled into defined-contribution plans owned by the employees will be available to help fund a solution. Second, the reform is structured to make a complete transfer of the problem to taxpayers the politically most-simple solution.