Liberty in economics J. SCOTT MOODY PRESIDENT NEW HAMPSHIRE CENTER FOR ECONOMIC POLICY New Hampshire’s Growing Public Pension Funding Crisis On the web at: http://nheconomics.org/ On Facebook at: http://www.facebook.com/pages/New-Hampshire-Center- for-Economic-Policy/167461656611296 On Freedom Connector at: http://connect.freedomworks.org/groups/new- hampshire-center-for-economic-policy
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Liberty in economics J. SCOTT MOODY PRESIDENT NEW HAMPSHIRE CENTER FOR ECONOMIC POLICY New Hampshire’s Growing Public Pension Funding Crisis On the web.
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Liberty in economics
J. SCOTT MOODYPRESIDENT
NEW HAMPSHIRE CENTER FOR ECONOMIC POLICY
New Hampshire’s Growing Public Pension Funding
Crisis
On the web at: http://nheconomics.org/On Facebook at: http://www.facebook.com/pages/New-Hampshire-Center-for-
Source: New Hampshire Retirement System andNew Hampshire Center for Economic Policy.
Liberty in economics
BUT, Pension Liability is Understated ! !
Economist Robert Novy-Marx (University of Chicago) and Joshua Rauh (Northwestern University) dispute the “discount rate”
According to the Government Accounting Standards Board, the discount rate is based on the long-term return of a 60 percent mix in stocks and 40 percent in bonds which is around 8 percent.
Novy-Marx and Rauh argue it should be the default-free rate of return—proxied by the 10 year yield on Treasuries or currently about 3.43 percent.
New Hampshire uses an 8.5 percent discount rate.Liberty in economics
NH’s Pension Liability Could Nearly Double
NH’s total pension liability, in 2008, was $7.8 billion.
Novy-Marx and Rauh estimate that the pension liability is at least $9 billion and could be as high as $14.2 billion.
This means the annual pension payment should be much larger.
Rauh estimates that the pension payment should be at least 75 percent higher.
In 2011, that means a payment of $486 million versus the actual payment of $277 million.
Liberty in economics
NH’s Pension Burden in Perspective
Table 4Pension Burdens by State and Rank
as of FY 2008Billions of Dollars
StateReported Pension
Liabilities
Minimum Estimated Pension
Liabilities
Maximum Estimated Pension
Liabilities
2007 GDPMaximum Estimated Pension Liabilities as
a Percent of GDPRank
Year Run Out
Rank (a)
Connecticut $42.8 $50.4 $80.7 $212.3 38.0% 25 2019 2Maine $13.7 $14.9 $24.0 $48.0 50.0% 8 2026 21Massachusetts $55.4 $63.3 $96.7 $352.2 27.5% 41 2026 21New Hampshire $7.8 $9.0 $14.2 $57.8 24.6% 46 2022 8Rhode Island $12.4 $14.8 $27.1 $46.7 58.0% 5 2027 24Vermont $3.8 $4.3 $6.7 $24.6 27.2% 43 2028 26Total $2,975.1 $3,250.5 $5,167.1 $13,623.2 37.9% -- -- --(a) States with the same date are ranked the same.
Source: Novy-Marx and Rauh, New Hampshire Center for Economic Policy.
Liberty in economics
Conclusion
Only serious reforms of the pension system will bring down the pension liabilities to sustainable levels.
Another study will examine reforms in more detail . . . complicated by court-mandated pension property rights.
But . . . the one obvious solution is to move from a defined-benefit system to a defined-contribution system for all new employees.
The OPEB liability is a lost cause and should be eliminated as WV recently did.