The estimate by Orin Kramer will fuel investors' concerns over the deteriorating financial health of US states after the recession. "State and local governments are correctly perceived to be in serious difficulty," Mr Kramer told the Financial Times.
"If you factor in the reality of these unfunded promises, their deficits will rise exponentially."
Estimates of aggregate funding requirement of the US pension system have ranged between $400bn and $500bn, but Mr Kramer's analysis concluded that public funds would need to find more than $2,000bn to meet future pension obligations.
Kenneth Anderson asks:
Two trillion dollars? One question about these obligations is whether taxpayers will stick around to pay them, or instead will vote with their feet. ("Vote with their feet" is something that has been discussed in various ways at VC "” as an aspect of a federal system and states with their own laws.) Many of these pension obligations have been incurred by municipalities and others by states, and in some cases the obligations are intertwined. But what happens if voters-taxpayers move out?
The assumption has long been that taxpayers are stuck, on account of jobs and other circumstance. But query whether that is necessarily true as the baby boom generation retires. In that case, it might find itself far more mobile, in circumstances where rising taxes at every level make relocation a more valuable decision at the margin. For that matter, if otherwise desirable locales manage to tax their businesses away, will the baby boomers' kids and grandkids have reason ever to locate in places that lack jobs? They might have been raised there "” but would they go back?
Would people leave California? They are leaving now, true, but would they leave in the future specifically for this reason or generally on account of the tax burden, particularly as retirees? Or New Jersey? What about the city of Oakland? Or even smaller cities, such as the towns in California "” not large at all, small towns, that have already declared bankruptcy over pension obligations? It's easy to move out of those towns.
My guess is that the Feds are going to pick up a lot of these state and local obligations, making it effectively impossible for taxpayers to escape them short of leaving the country (and creating the mother of all moral hazards, by the way). After all, if the current administration will bail out Wall Street banks with whom they have little ideological sympathy, they certainly will do so to keep SEIU-represented government employees in jobs.