NCPA - National Center for Policy Analysis

Unfunded Retiree Benefits Grow for States

March 16, 2012

Many state governments face towering fiscal issues in paying toward their future unfunded liabilities.  As more government workers retire and the American population becomes older, states will have to increase outlays for retiree benefits, which will be particularly expensive because of the rising costs of health care, says Bloomberg.

  • At least 20 governors and legislatures have failed to prepare ways to meet their projected expenses, says Sujit Canaga Retna, a senior analyst with the Council of State Governments.
  • Municipal and state governments have gradually expanded their payrolls, with local governments employing 14.1 million people in January, up 3.5 percent from January 2002, according to U.S. Labor Department data.
  • State employment has grown 1 percent to 5.05 million in the same period.
  • According to Bloomberg data, this leaves states with unfunded liabilities amounting to almost 96 percent of the $627.4 billion they were projected to owe for future retiree benefits in 2010.

Analysts are quick to emphasize that the size of the problem will only become larger as states fail to take action, with liabilities increasing rapidly and opportunities to collect revenue diminishing with time.  Some states, such as New Jersey, have recognized the danger these liabilities pose and have been proactive in addressing them.

  • In Bloomberg rankings that analyzed 47 states, New Jersey was found to be in the third-worst position, owing future state workers' retiree benefits almost $7,600 per resident.
  • In response to this issue, New Jersey lawmakers increased pension and health care contribution rates for government workers and raised the age for retirement with full benefits to age 65 from age 62.
  • The changes are forecast to cut costs by at least $10 billion over 30 years.

One of the issues that confronts states is a lack of political will on the part of lawmakers.  Unfunded liabilities for future retiree benefits represent a problem that will not become a crisis for many years if not several decades.  Consequently, it is difficult to pressure legislators to action.

Source: Darrell Preston, "States Facing 'Sleeping Cancer' in 96 Percent Unfunded Retiree Benefits," Bloomberg, March 7, 2012.

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