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Pension pipe dreams put taxpayers on hook: Analysis

Underfunded pension programs in U.S. states, cities and municipalities are "three or four times worse" than current government projections, said Joshua Rauh, senior fellow at the Hoover Institution think tank.

"The amounts of money [officials] are setting aside [for pensions] are far short of adequate," Rauh told CNBC's "Squawk Box" on Monday. "Taxpayers are going to get pretty soaked" when the time comes to make up the difference.

In a Hoover essay, "Hidden Debt, Hidden Deficits," Rauh argued U.S. public pension systems were actually running at a $3.4 trillion shortfall in fiscal 2014 when "optimistic assumptions about future investment returns" contained in government disclosures were tempered.

"Most public pension systems across the United States still calculate both their pension costs and liabilities under the assumption that their contributed assets will achieve returns of 7.5 [to] 8 percent per year," wrote Rauh.

"The trouble is we've lived through an amazing bull market in all ... asset classes. And what state and local governments are doing is they're betting that bull market is going to continue indefinitely," Rauh told CNBC.

That violates a fundamental principle of finance, he said. "You can't assume that you did well taking risky investments in the past [and] that you're going to get the same returns taking risky investments in the future."

"While total government contributions to pension systems were $109 billion in 2014, or 7.3 percent of state and local government revenue, the true annual cost of keeping pension liabilities from rising would be approximately $261 billion or 17.5 percent of revenue," Rauh wrote in the Hoover essay.

Depending on the true liabilities picture and the performance of financial markets, Rauh told CNBC he sees "many, many more cities going bankrupt" like Detroit "over the next five to 10 years."

Rauh, also a finance professor at the Stanford Graduate School of Business, cited California and Illinois as states with precarious pension outlooks, with Los Angeles and Chicago among the big cities with problems.

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