Outgoing New York Democratic Gov. David Paterson cautioned that "everyone will suffer" if there’s a public pension meltdown in 2011.
"You might see a serious downgrade of their public asset pools, and that would create a major problem," he told CNBC on Friday.
Unfunded pension liabilities in the United States are conservatively estimated at a trillion dollars a year, but two economics professors at Northwestern University and Rochester University estimate that it could be $2.24 trillion a year, he said.
"To put that in context, if GDP for 2009 was $14 trillion, we're talking about a 7-29 percent share of our entire economy," he went on to say. "And these pension funds, these funds will take center stage in 2011, because they've been able to carry off a lot of their bad assets."
In order to fix the pension crisis, said Paterson, it will be imperative to bring together employers, employees, lawmakers, investors, investment managers and organized labor to get rid of the "old chestnuts that it is Wall Street vs. Main Street."
"Wall Street is going to have to understand that these pensions are not huge capital investments; they are the tapestry of a lifetime of work of many people," he said.