New Hampshire’s Pension Burden

According to a recent report by the Pew Center on the States, in 2008, New Hampshire’s unfunded pension liability was $2.5 billion. Put simply, this means that the pension obligations owed ($7.8 billion) exceed the assets set aside ($5.3 billion) to pay them by $2.5 billion.  To pay for these obligations, New Hampshire’s state government was required to pay $252 million but only managed to contribute $189 million.  Not meeting these minimum payments only worsens the situation.

However, economists Robert Novy-Marx and Joshua Rauh have found that official pension and liabilities are being dramatically underestimated based on current actuarial methods. The problem revolves around the “discount rate” or “interest rate” used.  For example, a 5 percent interest rate means that a $100 today grows to $105 a year from now ($100 time 5 percent) while a 5 percent discount rate means that $105 a year from now is worth $100 today.  In effect, the discount rate is the opposite of the interest rate.

As shown in the table below, they found that New Hampshire’s $7.8billion unfunded pension liability increases to somewhere in the range of $9 billion to $14.2 billion.   More disturbingly, the maximum pension liability ($14.2 billion) is 24.6 percent of Gross Domestic Product ($57.8 billion).  Not that this offers much comfort, but at least that level of liability is only the 46th highest percentage in the country.  In number 1 ranked Ohio, pension liabilities exceed 71 percent of GDP!

As bad as that news is to policy-makers, new information paints an even more disturbing picture.  Since the reported pension liabilities are being dramatically understated, the current payments to the pension system are insufficient to fully-fund the pension system.  Not paying their full contribution (as the state did in 2008) only compounds that problem.  As a result, the pension system will at some have to start cashing-in the pension’s assets in order to pay benefits.

According to their calculations (pdf), New Hampshire’s pension system will run out of money in 2022—only twelve years from today. This is the 8th earliest (tied with Colorado, Kansas and Kentucky) date for insolvency in the country.  The earliest date is held by Illinois when they are projected to run out of money by 2018.

As we near the end of campaigning for this election cycle, the next Legislature and Governor will have to spend time reforming New Hampshire’s pension system.  If they do not, New Hampshire’s credit rating will begin to suffer and the cost of all debt will rise–and taxes along with it.