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-

Economic-Policy/167461656611296On Freedom Connector at: http://connect.freedomworks.org/groups/new-

hampshire-center-for-economic-policy 

Liberty in economics

What is the New Hampshire Center for Economic Policy?

Founded in 2010A 501(c)3 non-profit, non-partisan organization.Dedicated to pursuing public policies that are focused

on “Liberty in Economics.”Constitutional Government—setting limits to

government activismFiscal Federalism—clearly defining the roles between

state and local governmentsBalanced Budgeting—debt should be used only as a

last resortIntroduce Martin Sheehan, Director of

Communications

Unfunded Pension Liability is $3.4 billion

$4

$5

$6

$7

$8

$9

$10

2007 2008 2009 2010

Bill

ions

of D

olla

rs

Fiscal Year

Chart 2Unfunded Pension Liability is the Gap Between Assets and Liabilities

Fiscal Years 2007 to 2010

Assets LiabilitiesSource: New Hampshire Retirement System andNew Hampshire Center for Economic Policy.

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Unfunded OPEB Liability is $1 Billion

$0

$200

$400

$600

$800

$1,000

$1,200

2007 2008 2009 2010

Mill

ions

of D

olla

rs

Fiscal Year

Chart 3Unfunded OPEB Liability is the Gap Between Assets and Liabilities

Fiscal Years 2007 to 2010

Assets LiabilitiesSource: New Hampshire Retirement System andNew Hampshire Center for Economic Policy.

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Growth in NH’s Pension Payment

$0.0

$0.2

$0.4

$0.6

$0.8

$1.0

$1.2

2011 2015 2019 2023 2027 2031 2035 2039

Bill

ions

of D

olla

rs

Fiscal Year

Chart 4Unfunded Actuarial Liability Pension Payoff Projection

Fiscal Years 2011to 2040

UAAL PaymentEmployer Normal Cost

Source: New Hampshire Retirement System andNew Hampshire Center for Economic Policy.

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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.

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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.

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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.

Liberty in economics