NCPA - National Center for Policy Analysis


July 29, 2010

Due to the use of high discount rates, the liabilities of state and local government pension plans are underestimated, say Courtney A. Collins, an assistant professor of economics at the Stetson School of Business at Mercer University, and Andrew J. Rettenmaier, Executive Associate Director at the Private Enterprise Research Center at Texas A&M University and a senior fellow with the National Center for Policy Analysis. 

For example: 

  • Recent reports by the Pew Center on the States and others indicate that assets will cover about 85 percent of the pension benefits owed to participants.
  • But other studies that adopted lower discount rates have found liabilities may actually be 75 percent to 86 percent higher than reported.
  • As a result, taxpayers' role as insurer may be much greater than anticipated.

In addition to pension benefits, state and local governments often also provide other retirement benefits, especially postretirement health care benefits.  These nonpension postemployment benefits include such things as health insurance, dental and vision insurance, and prescription drug plans.  Unlike pension plans, most of these nonpension benefit plans are completely unfunded.  That is, assets are not being set aside to fund the obligations, say Collins and Rettenmaier: 

  • The Pew Center on the States reports that nonpension benefit unfunded liabilities across all states were about $537 billion in 2008.
  • According to Collins and Rettenmaier, estimates of the reported unfunded liabilities of state and local governments for pensions and other postemployment benefits total $1.03 trillion, but when these unfunded liabilities are recalculated using a more appropriate discount rate, the total unfunded accrued liability is much higher. 

Collins and Rettenmaier analyzed 153 state and local pension plans, representing more than 85 percent of liabilities for state and local pensions and other benefits, and recalculated their liabilities using a lower discount rate.  Their calculations show: 

  • Unfunded pension liabilities are approximately $2.5 trillion, compared to the reported amount of $493 billion.
  • Unfunded liabilities for health and other benefits are $558 billion, compared to the reported $537 billion.
  • Thus, total unfunded liabilities for all benefit plans are an estimated $3.1 trillion -- nearly three times higher than the plans report. 

Source: Courtney Collins and   Andrew J. Rettenmaier, "Unfunded Liabilities of State and Local Government Employee Retirement Benefit Plans," National Center for Policy Analysis, Study No. 329, July 29, 2010. 

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