Ep 53: What is the Public Pension Liability Crisis? with David McKnight

November 6, 2019
There are three words that don’t get mentioned very much, but they should scare the dickens out of you. Those words are Public Pension Liabilities. It’s a problem that is largely flying below the radar, but if you live in a state with a lot of public pension liabilities, it could end up like Detroit...

Episode Transcript - What is the Public Pension Liability Crisis? with David McKnight

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Hi there. David McKnight. Welcome to The Power of Zero show. It's good to have you onboard for yet another week. We finished a full year of podcast, we are venturing into our second year, so proud to be here and grateful that you are along for the ride. I am the best-selling author of The Power of Zero, Look Before You LIRP, and The Volatility Shield. You can buy all those books in bulk at We also made a movie called The Power of Zero: The Tax Train Is Coming. You can buy that DVD/Blu-ray combo pack at or you can stream it just about anywhere you can stream movies. Please, if you have a chance, follow me on Twitter. My Twitter handle is @mcknightandco.
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Today, we're going to talk about three words that don't get mentioned very much. They should be mentioned a lot more than they are and they should really scare the dickens out of you. The three words are Public Pension Liability. I think this is a problem that's really flying below the radar. I think a friend of mine, Van Mueller, talks about this a lot, but otherwise, it's not getting a ton of attention. It really should get a lot of attention because if you live in a state where there are a lot of public pension liabilities, you could end up like Detroit. We know what happens with public pensions is they swallow up most of the state budget so there's very, very little left over to provide basic, basic services.
Let's start off by defining what is a pension. A pension is a guaranteed stream of income—the keyword there is guaranteed—that gets paid to you either over your lifetime, over the life expectancy of you and your spouse, or some combination of the two. This used to be a really big deal in the private sector. Back in the day, if you work for a car company or a Fortune 500 company, a major American company, you got a pension, you got a guaranteed predictable stream of income once you retire. When I lived in Wisconsin, I had a lot of friends who were retired teachers that were living on pensions and they live very, very happy lives. They became phased out of the public sector. Why? Because they simply became too expensive. They've gone the way of the dodo bird with private corporations but they still persist in the public sector. Why do they persist in the public sector? I think it's because it's a great way for politicians to get elected or re-elected. They make promises of high salaries in the short term and lavish benefits over the long term. It's very, very easy for them to make a promise, then negotiate with those same unions who are feeding their campaigns with campaign contributions. It's sort of this corrupt merry-go-round whereby public-sector unions will lobby politicians, politicians will make promises to give them or continue to perpetuate their lavish benefits, and then ultimately, that cycle continues and continues and continues.
Now, don't get me wrong, I'm not saying for a second that the public employees that are the beneficiaries of these pensions have anything to do with this. We love our policemen, our firemen, our teachers, our city administrators, they are doing an outstanding job for us. However, we will get to the point where certain states will go bankrupt because they can't afford to pay the pensions that have been promised. For example, in California, who is one of the most fiscally unstable states in the country, they have over 62,000 pensioners who are getting over $100,000 per year. There's a city administrator that's getting over $400,000 per year. The state of Illinois is right on the cusp of bankruptcy like we mentioned because of all of the unfunded obligations that they have for pensions.
Again, I think that these public employees deserve competitive pay, they perform a Herculean task of teaching our children and keeping our streets safe, so they deserve competitive pay and retirement benefits, but people are living longer and cities are in this unique position where they have to not only fund their current budget, not only do they have to pay salaries to their current employees but they have to pay salaries to one or two generations of retirees who are likewise expecting these guaranteed benefits. We've got a problem here because, number one, when you ask the states to total up all their unfunded obligations, they're telling us that it adds up to about $1.4 trillion which doesn't seem like a big number and it's not a big number relative to perhaps the national debt, but if you ask the Federal Reserve, the Federal Reserve says that the number is actually much higher than $1.4 trillion, it's actually closer to $4 trillion. I've seen some numbers that put that number as high as $5.3 trillion.
Right about now, you may be asking yourself, “What does all of this have to do with The Power of Zero?” I think that's a good question. You have to realize that the precarious position that states are in, they can only raise taxes so high at the state level or people will start fleeing their state. They'll still receive the pension no matter what state they live in, but the rest of the employees are going to start fleeing the state. You've seen that happen in New York where they raised taxes on the rich people and rich people ended up leaving. So that's not really the solution. Remember, states can't print money, their budget is what it is and if they run out of money, they run out of money and they have to start cutting things or no longer provide any basic services. What is likely to happen in the big scheme of things? Most people believe that the government will intervene, the federal government will intervene because they have the ability both to print money and to raise taxes on everybody else for the purpose of bailing out these states who are teetering on the cusp of insolvency.
We talk about the national debt, we talk about it frequently, we talk about all of the reasons why we are in dire straits as a country when it comes to the fiscal path of moving forward, but a lot of times, we forget about what's happening at the local levels, not to mention that if you have a state that not only has all these unfunded obligations, but they have these municipal bond obligations that they could potentially default on, all of that adds up to one big bailout from the federal government. Look, if the federal government can bail out General Motors, they can also bail out a state, especially when it means that you have all these millions and millions of people in retirement that were told that they could count on a guaranteed stream of income that risk losing that guaranteed stream of income. So what we are likely to see is government intervention and that will likely happen in the next seven or eight years to bail out some of these states. How would you suppose they're going to pay for that government intervention? How are they going to bail out all of these states? It's by raising taxes on you and on me.
Now, I don't like to be the guy that is the bearer of bad news every week but I do think that we need to approach these things soberly with eyes wide open because if we just sweep it under the rug, then we're going to get what Mark Sanford—in a few weeks ago, I talked about Mark Sanford—he says, “There is a storm looming on the horizon. We don't even have time to wait until the next presidential election. We have to act now because there will be the straw that breaks the camel's back.” So I think we need to keep in mind that public pension liabilities are a chicken that will come home to roost sooner or later. It will not likely be the states that have to bail themselves out or take the cost-cutting measures to go into austerity mode to be able to deliver on all these pensions, I think what's going to happen is you're going to see the federal government that steps in, intervenes, raises taxes on you and me to be able to deliver these pensions from the fiscal abyss into which they've descended over the last couple of years.
Now, obviously, there are some solutions to what states can do to be able to fix the problem. I don't think they're likely to do it but there are solutions. The number one solution is they can start weaning themselves off of these pensions, in other words, new employees that are coming into the system, they can just give them, say a 403(b) which functions very much like a 401(k) to allow people to save for their own retirement so less and less of the onus is on the state government and more and more onus is on the individual investor or government worker who wants to be fiscally secure for retirement. That's going to take a lot of will power on the part of politicians because politicians love to bend the truth, they love to tell you exactly what you want to hear and that's that if you vote for them, you're going to get a lot of free stuff.
I'm reminded of the article I read this morning about Elizabeth Warren's promise—and again, I'm trying to stay as apolitical as possible—Elizabeth Warren's promise for Medicare for all, it's got a $30 trillion price tag and the federal government actually did the numbers on this and they said, “You could tax the rich people in our country at 100%,” in other words, confiscate all of their income each and every year and you would not even come close to paying for the cost of $30 trillion price tag for Medicare for all. Bernie Sanders has been much more straightforward and open about it, he says, “Tax rates will have to go up for everyone to be able to pay for Medicare for all.” I think politicians have to be much more transparent about what the price tag associated with what they're promising. We can no longer afford to lavish our public sector employees with all of these very, very expensive pensions that are supposedly “guaranteed” to flow into their bank account from the time they retire until the time that they die. There's a big storm looming on our horizon from the federal government's perspective but there's a little smaller looming storms, smaller micro storms if you will, that are looming on the more immediate horizon. I think one of the ones that doesn't get talked about enough is this public pension liability, not to mention the fact that a lot of states could really default on a lot of their municipal bond offerings if they can't get their fiscal house in order.
We went about 12 minutes today. I didn't want to keep it too much longer than that but I appreciate you guys tuning in for The Power of Zero show. Our following is growing bigger by the week and I appreciate your loyalty and tuning in every week. Again, bestselling author of The Power of Zero, Look Before You LIRP, and The Volatility Shield. You can get those in bulk at You can watch the movie online, you can follow me on Twitter @mcknightandco. If you have a chance, I'd be really honored if you put a review for any of our books on Amazon. If you haven't done so, believe it or not, it really, really helps when we get lots of reviews on there. Thanks for being on the podcast today and we will talk to you next week.

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