NCPA - National Center for Policy Analysis

Pension Woe Mounts As States Forsake Reform

September 21, 2012

States are scrambling to find a solution to soaring pension debts. Since 2009, more than 40 states have reported enacting some manner of changes to their pension systems to save money. However, these changes do nothing and make governments spend more of their budgets on their pension system, says Steven Malanga, a senior fellow at the Manhattan Institute.

  • From 2008 to 2010, unfunded pension and retiree health care benefits grew 38 percent to $1.38 trillion.
  • Since 2008, pension liabilities have soared to an estimated $4.6 trillion, a $2 trillion increase.
  • The average investment returns on all public pension funds was only 1.1 percent, compared to the anticipated 7.5 percent to 8 percent.

Many states have pursued feeble strategies to take care of their pension problems but have been met with fierce opposition from union lobbyists.

  • California passed a watered down version of a bill that would have saved $50 billion over the next 30 years.
  • Twenty-three states have raised the retirement age for new workers and increased the number of years those employees need to work before they access benefits.
  • However, these reforms don't affect the current workforce.
  • Similarly, New York created a less expensive pension system for new employees that would save $21 billion over the next 30 years. However, the savings don't mean much in the context of the $259 billion New York will have to contribute to its pension funds.

The reason states end up passing laws that only affect new employees is that many states write into their constitutions that no changes can be made to benefit levels of current workers. New Jersey is considering proposals to their constitution that would allow benefits to be cut to current employees.

Utah and Rhode Island provide examples of states that show promise in their pension system reforms.

  • After the stock market decline of 2008, Utah's pension went from 95 percent funding to 87 percent.
  • Furthermore, they closed down its defined benefit pensions to new workers and opened a 401(k) style retirement savings account.
  • This reduced the risk that Utah would go bankrupt from 50 percent to 10 percent.
  • Similarly, Rhode Island suspended annual cost-of-living adjustments for retirees.
  • Furthermore, new employees were put in a system where they have small defined benefits and a 401(k) style plan.
  • This is estimated to have cut the pension system's unfunded liabilities in half to $3 billion.

Source: Steven Malanga, "Pension Woe Mounts As States Forsake Reform," Real Clear Markets, September 12, 2012.


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