It might seem puzzling that last month's New York transit strike was apparently triggered by a dispute over pensions that would have cost the employer, the transit authority, only $20m over three years. But even more than the tales of underfunded corporate pensions that pop up with increasing frequency, the transit strike is the critical harbinger of things to come – because whatever the precise dollar size of the US corporate pension deficit, the aggregate shortfall of public sector pensions is more than twice as large. As accounting standards for pension funds are tightened in 2006, the problems will become more visible.
Using real-world economic assumptions instead of actuarial fictions, the total public fund shortfall over the next decade appears likely to be at least $700bn-$1,000bn. Unfunded health retiree benefits will inflate that range sharply. The pension deficit by itself means that for the states with the largest populations, either the social contract with employees will be rewritten or the functions government performs will be curtailed. If this were the private sector, unfunded retirement costs would already have led to bankruptcy court. Because states and cities can putter on even while economically insolvent, the work-out is more difficult to manage. But structural change is inevitable.
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