PROMISES TO KEEP
March 1, 2010
America's states have a $1 trillion gap between benefits they have promised and the assets to pay for them, according to a report published in February by the Pew Center. Sadly, this may be an underestimate, says The Economist.
Pew used data from the states' fiscal year that ended in 2008, the most recent for which comprehensive figures are available, so the $1 trillion does not include losses from late 2008 and early 2009 (or the partial rebound since then). In 2008, state pension funds lost more than 25 percent of their value. In some states, the downturn has prompted reform. Those that failed to act now face even bigger problems, says The Economist.
- Some 84 percent of public employees have defined-benefit (DB) retirement plans, which guarantee a pension based on final salary and years of service, compared with a mere 21 percent of private-sector workers.
- In addition, most plans are sacrosanct, protected by state constitutions; if a state has promised a pension, it must pay.
The recession battered all states' pension funds, but some were less equipped to take it than others did:
- Colorado and California were among those that increased benefits in happier days, failing to consider that the market might succumb to gravity.
- Illinois has America's most underfunded pension system; in January, the state took the easy option, issuing another $3.5 billion in pension bonds; such bonds are not always disastrous, but Boston College's Center for Retirement Research points out that most governments are already in severe debt when they issue them.
The good news is that many states have responded to the downturn with reforms, says The Economist:
- New York has raised the retirement age for new hires.
- New Hampshire is among those to require new workers contribute more of their salary to the pension fund.
- Georgia and Nevada have changed their ways of calculating benefits.
Source: Report, "Promises to keep," The Economist, February 20-26, 2010.
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