The Public Pension Death Spiral

Pensions are causing a fiscal calamity most US taxpayers are not even aware of. There is a way to fix them, but it will take courage.

Jay Rogers | March 22, 2026

America is careening toward a fiscal crisis that makes 2008 look manageable, yet most taxpayers remain unaware that it is coming.

State and local governments currently owe $1.37 trillion more in pension benefits than they have saved to pay them, per the Equable Institute, and that uses accounting standards governments themselves prefer.  Apply the market-based discount rates Stanford economist Joshua Rauh of the Hoover Institution considers the only honest methodology, and the true shortfall reaches $5.1 trillion, roughly the annual GDP of Japan.

This a structural death spiral.  Rising pension costs force tax increases and service cuts, which drive out residents and businesses, which shrinks the tax base, which forces still higher taxes, until something breaks.  We have already seen a road map for what “breaks” looks like.  It is called Detroit.

Pension distress is not randomly distributed, and treating it as apolitical is a courtesy the data cannot support.  Per the Equable 2024 State of Pensions report, five states qualify as “distressed” with funding ratios below 60 percent: South Carolina, Connecticut, New Jersey, Illinois, and Kentucky.  All five have been governed by Democrat majorities for most of the past two decades.

Illinois is the standard-bearer for failure.  Its five state pension systems carry a combined funded ratio near 45 percent and an unfunded liability exceeding $142 billion.  The state already devotes roughly 20 percent of its general fund budget to pension contributions, crowding out education and infrastructure.  New Jersey’s teachers’ pension fund, designated “Deep Red” by the Urban Institute as one of the nine worst public pension funds in the country, was projected for insolvency by 2027 by the Center for Retirement Research at Boston College.  When assets run dry, $4.5 billion in annual benefit payments fall directly onto the general budget of a state already among the highest-taxed in the nation.  Meanwhile, CalPERS, the country’s largest public pension fund, reported a market-value funding ratio of roughly 48 percent in the most recent comprehensive study, while publicly projecting figures nearly 30 points higher by using discount rate assumptions that bear little relationship to what markets actually deliver.

This crisis was not delivered by bad luck.  It was manufactured by a feedback loop between public-sector unions and the politicians they finance. Public-sector unions contributed over $1 billion to political campaigns in 2024, with the vast majority flowing to Democrat candidates.  The return on that investment is straightforward: Unions deliver money and organizational capacity; in exchange, elected officials protect defined-benefit plans, block structural reforms, and allow union appointees to sit on the pension boards that vote on benefit levels and contribution rates.  In California, union representatives hold multiple CalPERS board seats and vote on their own members’ benefits.  In Illinois, AFSCME and SEIU funded Governor Pritzker’s campaigns while simultaneously pursuing litigation to block reform.

I have spent thirty years advising ultra-high-net-worth families on capital allocation and fiduciary responsibility.  When a conflict of interest this severe exists at a client meeting, we have to disclose it and/or remove the conflicted party.  The public pension system does neither.  It treats the conflict as a design feature.

The accounting mechanism that sustains this fiction deserves equal scrutiny.  Public pension funds assume average annual returns of 6.87 percent to minimize the contributions governments must make today.  Professor Rauh’s research demonstrates that pension obligations, which carry essentially zero default risk from the employee’s perspective, should be discounted at the risk-free rate, near long-term Treasury yields.  That methodology converts a $1.37-trillion shortfall into a $5.1-trillion debt that governments have simply chosen not to place on the balance sheet.  Illinois paid only 40 to 60% of its required contributions from 1995 to 2015, while maintaining retirement formulas featuring 3% compounding COLAs and pension-spiking schemes no fiscal reality could support long-term.  These were political promissory notes written by one generation and billed to the next.

The solution is not theoretical.  The working models already exist, and they have audited balance sheets to show for it.

Wisconsin’s Act 10, enacted in 2011, required employees to contribute 50 percent of pension costs, prohibited employer pick-ups of employee contributions, and capped collective bargaining to wages only.  The political response was dramatic: Senate Democrats fled to Illinois to deny quorum.  The fiscal result speaks for itself.  Wisconsin has maintained a fully funded pension system for more than a decade, and Act 10 has saved taxpayers an estimated $16 billion since enactment.  Tennessee and South Dakota, funded at 107 and 100 percent, respectively, demonstrate that full funding is achievable through contribution discipline and realistic actuarial assumptions, not financial engineering.  Utah’s hybrid plan pairs modest defined benefits with 401(k)-style accounts, giving employees retirement ownership without transferring unlimited actuarial risk to taxpayers.

These systems share a common set of principles: assumptions grounded in market reality; mandatory contributions that cannot be deferred when budgets tighten; benefit structures sized to the resources actually available; and, crucially, competitive elections that force politicians to answer for what they have promised.  The last element may be the most important of all.

The 2021 American Rescue Plan included roughly $80 billion in relief for failing multi-employer pension plans, establishing a troubling precedent.  If a Democrat administration returns with cooperative congressional majorities in 2028, blue-state governors will make compelling arguments about systemic risk and public employees who planned their retirements in good faith.  I would ask them to explain why Wisconsin taxpayers, who absorbed the political cost of structural reform and maintain a fully funded system today, should subsidize the consequences of California’s and Illinois’s choices.

The federal government already carries a national debt exceeding $39 trillion.  Folding $5.1 trillion in state pension liabilities onto that balance sheet does not solve the funding problem.  And a federal bailout creates a moral hazard with no logical boundary: Fiscal irresponsibility becomes the rational strategy for every state that has not yet adopted it.  The proper federal role is to establish an orderly restructuring framework, analogous to Chapter 9 bankruptcy for municipalities, so that insolvent systems can reorganize without systemic contagion.

The bill for decades of fantasy accounting, union capture, and insulated one-party governance is coming due.  The 2028 election cycles will determine whether reform arrives through political courage or through the involuntary discipline of collapse.

Scott Walker demonstrated in Wisconsin that a fully funded system can be built from the wreckage of a structural deficit, given the will to accept short-term political cost for generational fiscal solvency.  The alternative is to keep writing checks the next generation did not sign.  Your children and grandchildren are watching.

Jay Rogers is a financial professional with more than 30 years of experience in private equity, private credit, hedge funds, and wealth management.  He has a B.S. from Northeastern University and has completed postgraduate studies at UCLA, UPENN, and Harvard.  He writes about issues in finance, constitutional law, national security, human nature, and public policy.

Image: kolyaeg via Pixabay, Pixabay License.

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