U.S. federal, state and local pension funds combined face an estimated $7 trillion funding gap, said a new report from Moody's Investors Service.
The ratings agency estimates unfunded pension liabilities for federal employee retirement systems covering civilian and military employees amount to about $3.5 trillion and that state and local pension funds have another $3.5 trillion, for a combined shortfall of roughly $7 trillion equal to 40% of the 2015 U.S. gross domestic product.
That amount, while significant, is a moderate risk compared to the projected funding gap for Social Security (estimated at $13.4 trillion or 75% of GDP) and Medicare's hospital insurance component (estimated at $3.2 trillion or 18% of GDP), Moody's said.
The report, which also assessed the pension burdens of other highly rated developed countries, found the U.K. has unfunded liabilities equal to roughly 66% of its 2014 GDP. At the other end, Canada faces unfunded liabilities equal to roughly 12% of its GDP in 2014.
The report notes that Moody's considers the federal pension system unfunded due to an accounting mechanism in which the pension funds are issued non-negotiable Treasury bills in exchange for contributions. The securities held by the funds are excluded from the public debt held by the public.
The report also notes that Moody's estimate for state and local pension fund surpasses the Federal Reserve's estimate by $1.8 trillion because of certain adjustments adopted by Moody's.