In Ernest Hemingway’s “The Sun Also Rises,” Mike is asked how he went bankrupt. His reply: “Two ways. Gradually, then suddenly.” He might as well be describing the prognosis for many of the nation’s 5,300 public pension funds, which hold $4.4 trillion in assets against what the Federal Reserve estimates to be $9 trillion in liabilities.

Most U.S. public pensions plans were in surplus in 2000. Today, based on their own accounting – which differs from that of the Fed – they hold less than 75 cents on every dollar they owe to their 33 million plan members. Funding gaps are now affecting municipal bond ratings, and COVID-19 has introduced new stresses to public finance. Pension reform is needed, yet no one seems to know what to do.

And few want to rock the boat. We argue in a recently published study that there is a way out, even for public pension systems as deeply underwater as those in Illinois, Kentucky and New Jersey. The answer? Just look north to Canada to see what can be done.

Canada today has a public pension system that is well-funded and sustainable. This was not always the case. Until the late 1980s, its public pensions were in poor shape. During the inflationary 1970s, benefits were enhanced with retroactive indexation not matched with increased funding. Contributions were commingled with other public funds and lent to Provincial governments, not invested in markets. In some cases, Canadian provinces didn’t even have a good grip on the true actuarial value of their pension liabilities.

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