NCPA - National Center for Policy Analysis

States Created Their Public Pension Problems, and States Should Solve Them

January 25, 2012

Today, 31 states are sponsoring public pension plans with funding ratios that are under 80 percent of what is needed to pay full benefits, says David John, a senior research fellow in retirement security and financial institutions at the Heritage Foundation.

  • Funding ratios measure a pension plan's current assets, projected contributions and investment earnings in relation to its predicted benefit obligations.
  • A ratio that is under 80 percent indicates that the plan is in severe trouble and will have great difficulty meeting its obligations.

This is not a small problem. 

  • A 2010 academic study estimates that 116 major state-sponsored pension plans have assets of about $1.8 trillion to pay pension promises of between $3.6 trillion and $5.2 trillion.
  • This leaves a gap of between $1.8 trillion and $3.4 trillion.
  • A follow-up study found that major pension plans for municipal workers in 50 major cities add an estimated $574 billion to the problem.

Fixing the problem will not be easy, but Congress should not step in and attempt to impose a solution, a model for reform, or a bailout of severely troubled states.  Just as states and local governments created the public pension problems they now face, it should also be their responsibility to deal with these situations.

Indeed, data from the National Conference of State Legislatures (NCSL) show that federal action does not appear to be necessary, as more states are taking actions that will reduce their underfunding.  The states should be left to continue their efforts, prompted by pressure from taxpayers and the bond markets.

Congress should ensure that state and local government bond issues sold in national markets include a full and accurate disclosure of the risks, especially if any underfunded public pension programs might damage the issuing jurisdiction's ability to repay its debts as scheduled.  Otherwise, Congress should remain watchful but refrain from action.

Source: David John, "States Created Their Public Pension Problems, and States Should Solve Them," Heritage Foundation, January 17, 2012.

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