Policy

We Are Out of Money: State Pensions Edition

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Today's Washington Post gives the full-article dire-warning treatment to a new Pew study on long-term state benefit obligations. Unless you get really excited by giant-sized, unpayforable public liabilities, the news is pretty bad: States are on the hook for a trillion-plus bucks in pension benefits that they don't have money to pay for:

The state funds that pay pension and health-care benefits to retired teachers, corrections officers and millions of other public workers faced a cumulative shortfall of at least $1.26 trillion at the end of fiscal 2009, according to a new report.

The study, to be released Tuesday by the Pew Center on the States, found that the pension and health-care funding gap increased by 26 percent over the previous year. Pew officials said the growing shortfall was driven by inadequate state contributions, an aging population and market losses that accompanied the recession.

…"In many states, the bill for public-sector retirement benefits already threatens strained budgets and is competing for resources with other critical needs, including education, infrastructure and health care," said Susan Urahn, managing director of the Pew Center on the States.

In reality, the numbers are probably a lot worse. Pew calculated the headline liability figures by using states' overly rosy assumptions about pension fund growth:

In making its calculations, Pew used the states' assumptions for what their pension funds would earn in annual investment returns, typically 8 percent — a figure that states have mostly met in recent decades but that some analysts think is now overly optimistic.

If states calculated their investment returns the same way that private firms are required to for their pensions, their obligations would balloon to $1.8 trillion, the report said. If states pegged their returns to 30-year Treasury bonds, an even more conservative standard, the liability would be $2.4 trillion.

But why worry? After all: "Government employee union leaders, meanwhile, say the problems plaguing public pension plans are largely overstated," reports the Post. Maybe if we all ignore it long enough, that trillion-dollar liability will just up and disappear. Fingers crossed! 

Read Reason economics columnist Veronique de Rugy on the state-pension time bomb.