The trillion-dollar gap arises from the government method of accounting, which several experts say significantly underestimates the cost of future pension payments.
“It’s been a perfect storm,” said Alicia Munnell, director of the Center for Retirement Research at Boston College. When the pension liabilities are correctly tallied, “you get a very, very large number.”
The cost of pension plans for the approximately 17 million state and local government workers have come under heightened scrutiny in recent weeks, particularly in Wisconsin, New Jersey and other states where governors are struggling to balance budgets and reduce costs.
In Wisconsin, for example, Gov. Scott Walker (R) wants state workers to pay 5.8 percent of their wages to fund the pension.
Even under current accounting methods, state and local governments are facing massive pension shortfalls — at least $344 billion, according to calculations by the Center for Retirement Research and other groups.
But when the accounting is revised to value future payments more accurately, in the critics’ view, the amount that pensions are underfunded grows to more than $1.9 trillion, according to Munnell’s calculations for 126 large plans.
Those calculations have been published in part in a working paper for the National Bureau of Economic Research.
By comparison, the entire federal debt held by the public is $9.3 trillion.
“By virtually any measure, that’s an enormous number,” said Jeffrey R. Brown, a finance professor at the University of Illinois who has studied the issue. “When you’re short that much money, at some point you have to pay the piper.”
If the pension obligations are as enormous as critics say, virtually every state and local government running a pension will have to invest more in its pension plan — either by cutting services or raising taxes — or gamble that it will achieve a high rate of return on its investments.
Most government pension plans assume they will earn about 8 percent a year on their investments. Some have achieved those returns over certain periods, but critics think that the assumption is too optimistic.
Among them is billionaire investor Warren E. Buffett, who in a 2008 letter predicted that taxpayers will pay the price when the forecasts prove wrong.
“Public pension promises are huge and, in many cases, funding is woefully inadequate,” he wrote. “In a world where people are living longer and inflation is certain, those promises will be anything but easy to keep.”