US public pension system has $3.4tn hole

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13 Apr, 2016

US public pension system has $3.4tn hole

The US public pension system has a $3.4tn funding hole in it that will pile on the pressure for cities and states to act, deVere Group can report.

Official figures of the government have this estimate at more than 3 times lower, but the collective funding shortfall is actually much larger and getting progressively worse, according to academic research published by the Financial Times.

US Republican Congressman, Devin Nunes, stated: “It has been clear for years that many cities and states are critically underfunding their pension programmes and hiding the fiscal holes with accounting tricks. When these pension funds go insolvent, they will create problems so disastrous that the fund officials assume the federal government will have to bail them out”.

The cities of Detroit and San Bernardino have filed for bankruptcy and are known to suffer from large pension shortfalls, with the fear being that other cities will also follow suit due to gaping pension holes. The regions that the Stanford study has identified as the most at risk are Chicago, Houston, El Paso and Dallas.

As a measure to combat public pension holes, cities will be forced to either cut spending or raise taxes to provide the necessary funding. States and local governments currently contribute 7.3% of their revenues to public pensions, but this would need to rocket to 17.5% to prevent the hole from widening further, according to the research.

A professor at the University of Pennsylvania, Olivia Mitchell, summarised that the public pension system was facing “grave difficulties”. She concluded: “I do believe that US cities and towns will continue to suffer, and there will be additional bankruptcies following the examples of Detroit”.

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