What does the Federal government have that states do not? A PRINTING PRESS! This one reason why there isn’t a balanced budget in most countries. If there is ever a shortfall, they have the option of printing their way out of it. The print without discretion because they have no tangible backing to their currency (i.e., backed by gold or any other tangible species). States on the other hand DO NOT have a printing press. States rely on sales taxes, income taxes, fees, and tolls to create revenue. If they run out of money, they have to institute austerity measures like cutting services and delaying benefits. Another option is to try and raise revenue by raising taxes. When states run out of money the residents of those states and especially state employees pay the price.

There is a crisis unfolding and the end result is inevitable. State Pension funds are becoming insolvent and state employees who were expecting a fruitful retirement will have a rude awakening. Let me repeat that: STATE PENSION FUNDS ARE BECOMING INSOLVENT!

In 2010, Joshua D. Rauh from the Department of Finance, Kellogg School of Management, Northwestern University conducted research on the sustainability of State Public Pensions. His research concluded with the year that each state will run out of pension fund assets assuming they earn 8% on their assets and they use future contributions to fund new benefits in full. Other assumptions used in the study are that revenue growth is 3% per year. HERE IS THE LIST IN ORDER from soonest to latest that the state pension funds run dry meaning they are INSOLVENT, and participants will no longer be able to count on their pension for retirement assets. Also added to this research is a study compiled by Anthony Randazzo and Dr. Jonathan Moody of Equable. Their research on the current state of pension shows two things. First, the under funding of state pensions is at an all-time high of $1.34 trillion. $1.34 trillion more liabilities (payments and future payments) than assets. The second takeaway of significance is the actual rate of return from the assets held in the state’s pension accounts.

The research was not surprising as we have had declining interest rates since about 1983. When the majority of pension funds are allocated into bonds, a declining yield will wreak havoc on the internal rate of return of each pension fund. Professor Rauh’s research study had an assumption of 8% to determine the years that each state’s pension funds go belly-up. The current numbers reflect the couple decades of declining yields. The average rate of return in 2020 is less than half of the initial projection. This will only accelerate the time before the state pensions become insolvent. This is not a matter of if at this point, but a matter of when.

What is exacerbating this crisis even more is the unemployment impact of COVID-19. Not only are the investment returns substantially lower than estimated returns, but the number of participants making new contributions into the plans is shrinking for two reasons. Reason number one is unemployment, the other is more structural to the economy. Unemployment due to COVID-19 is exceptionally high.

With over 30 million people unemployed in America, there are simply fewer people working for much of 2020 paying into the programs. All of the pension plans in America require new money to pay off old. This can almost be likened to a legalized Ponzi scheme. Cooked into this soup is the fact that over time as workers age and then retire, there will ultimately be a very top-heavy pension plan with more people in retirement receiving benefits than a younger population working and paying into the system.

Structural demographic changes are also going to have a lasting impact. The fertility rate in the United States has fallen below 2.0 for the first time ever. What does this mean? If the fertility rate is 2.0 it means that parents have two kids. So, when both parents ultimately die, if they had two kids, they replace themselves and the population stays the same. With a fertility rate greater than 2.0, the population is growing, and society is expanding. At less than 2.0, it means that the parents have not replaced themselves and the population will shrink. That’s where we are in America and most of the western economies of the world and industrialized Asian economies. Across the board this is a problem for the entitlement system as a whole. It spreads wider and deeper than just state employees. With fewer people working and paying into the system, the entire economy could be crushed under the weight of the entitlement system. As the baby boomer generation is in retirement years and receiving benefits without paying into the system and a smaller population in their working years actually working to pay into the entitlement and welfare system the aging population and lack of revenue will ultimately crush the economy.

Let’s dig a little deeper into this. The Roman republic fell when 1/3 of the revenues were being paid into the welfare state. The Roman Republic collapsed from within, not due to external forces. You can only rob Peter to pay Paul for so long without fresh tax-payer revenue coming in to keep the system afloat.

Let’s consider the reality of the United States by looking at the Federal Budget. If Rome fell when 33% of revenues were going into the welfare system and the whole economy collapsed under that weight, it would be fair to say that America is less than that as we have not collapsed. Look at the numbers and we will see:

In fiscal year 2020 look at the mandatory programs:

Social Security: $1.092T

Medicare: $694B

Medicaid: $447B

Other Mandatory Programs: $743B

Those total $2.975 trillion. Under the receipts category (which is revenue) equals $3.706 trillion. That’s 80.3% of all Federal tax revenue goes out towards entitlements like Medicare, Medicaid, food stamps, WIC, and other programs. Social Security technically is not an entitlement as we pay into it our entire life in exchange for a retirement years income stream, but it cannot be taken away easily, so therefore like all other entitlements they become sticky. The Roman Empire collapsed under 33% of revenue going towards entitlement programs. The United States is at 80.3%. This is unsustainable. Add to this the net interest on the national debt, which at around 2.0% interest on a 30-year bond is a whopping $376 Billion. At the lowest interest rates in the history of America, the net interest plus entitlement payments equals 90.4% of all U.S. federal tax revenue.

The eerie implications of the massive amount of unsustainable debt are devastating in impact on small interest rate moves. Consider what the Net interest on $27 trillion of federal debt will be when interest rates are the following:

4% = $752 billion

6% = $1.128 trillion

8% = $1.504 trillion

When interest rates reach 3% net interest plus entitlements equal 100% of the entire federal tax revenue! Interest rates are cyclical and throughout history move from high to low or low to high around every 28 years. Interest rates in 1983 were 18% of a 30-year bond! The interest rate cycle is at the end of its downward trend and can only go up from here.

How can this be fixed? A balanced budget amendment is out of the question. There are only two ways to balance the balance sheet. Increase revenue or decrease expenditures, or a combination of both. When over 80% of expenditures are entitlements or mandatory payments something has to ultimately give. Options are instituting austerity measures such as (reducing benefits, making it more difficult to receive benefits, changing the age at which benefits become available, or eliminating the benefit altogether). It is EASY to add benefits to a voting populace, but once an entitlement is given, it becomes almost impossible to take it back without incurring a revolution of sorts. The other side of the balance sheet is to increase revenues. This cannot be done via increasing taxes as we are already living at the margin in America. If tax rates are increased when people have disposable or discretionary income, people will continue to spend and the increase in taxes will have the net effect of raising government revenue. However, when living at the margin, raising taxes is the equivalent of reducing income, and when there is no disposable or discretionary income people will be forced to change their spending habits and government tax revenue via sales tax, and income tax will be reduced).

The only other way to fix it is through policy adjustments to bring jobs back to America. We need to get Americans working again, generating revenue, creating products that the world wants to purchase. A combination of monetary and fiscal policy adjustments will help with this. Tariffs, weakening the U.S. Dollar, and reducing red tape through agency level policy actions will bring manufacturing back to America, will all add to increasing exports, decreasing imports, and helping to start slowing fixing the massive shortfalls and imbalances on the Federal Government’s budget.

Pulling it all together, State Pensions are facing insolvency and rapidly. The federal government will soon run out of money as soon as interest rates start to rise. There are corporate and individual actions that can be implemented to take advantage of these trends rather than the trends taking advantage of you. Now is the time to act and make structural changes to your portfolio, company, and way of life. The MIA has made arrangements for you to get your questions answered through our regular contributor to the MIA, Kirk Elliott PhD.

Kirk Elliott, PhD is an economist, entrepreneur, and philanthropist. He has a PhD in Public Policy and Administration as well as a PhD in Theology. He and his team advise politicians, CEOs on growth strategies and has a global clientele. The MIA has arranged for a free consultation with Dr. Elliott if you would like to talk about strategies for you or your company to navigate through the transitory economy that is bearing down on us. Email his team at or call 720.605.3900 to schedule the free consultation that MIA has arranged for you.


Brown, Jeffrey, and David Wilcox, 2009.

“Discounting State and Local Pension Liabilities.” American Economic Review 99(2), 538-542.

Munnell, Alicia, Kelly Haverstick, Steven Sass, and Jean-Pierre Aubry, 2008.

“The Miracle of Pension Funding by State and Local Pension Plans.” Center for Retirement

Research, Issue in Brief #5.

Randazzo, A. and Moody, J. (2020). State of Pensions 2020, Equable: New York, NY

Rauh, Joshua D. (2010). Are State Public Pensions Sustainable? Why the Federal Government Should Worry About State Pension Liabilities?

Novy-Marx, Robert, and Joshua Rauh, 2010.

“Public Pension Promises: How Big Are They and What Are they Worth?” University of

Chicago Working Paper

565 views0 comments