Public pension promises exceed ability to pay

When Detroit went bankrupt in 2013, investors were shocked to learn that the city had promised pensions worth billions more than anyone knew — creating a financial pileup that ultimately meant big, unexpected losses for Detroit’s bondholders.

Now researchers at Citigroup say the groundwork has been laid for similar conflicts across the developed world: Governments have promised much more than they can most likely pay to current and future retirees, without revealing the disparity to investors who bought government bonds and whose investments could be at risk.

Twenty countries of the Organization for Economic Cooperation and Development have promised their retirees a total $78 trillion, much of it unfunded, Citigroup said in a report.

That is close to twice the $44 trillion total national debt of those 20 countries, and the pension obligations are “not on government balance sheets,” Citigroup said.

“If you owed student loans of $44,000, and the bank called you up and said, ‘Actually you owe $134,000,’ you’d fall off your chair,” said Charles E.F. Millard, head of pension relations at Citigroup. “That’s what this is.”

He said he did not expect all the overextended governments to experience sudden head-on collisions between bondholders and pensioners the way Detroit did. Instead, he said many of those countries — as well as many American states, cities, school districts and other jurisdictions — would keep struggling along, cutting more and more services, raising taxes, and wondering where all the money was going.

“It’s not going to be, for most cities and states, some enormous collision or explosion,” he said. “It’s going to be 10 fewer cops, or three fewer teachers, and, ‘Let’s fix the bridge three years from now.’ ”

One of the report’s recommendations was that governments start disclosing the amounts promised to retirees, “so that everyone can see them.”

This story was originally published March 18, 2016 at 12:58 PM with the headline "Public pension promises exceed ability to pay."