Pension Crisis

The COVID-19 Economic Collapse Is Absolutely Wrecking State Pension Systems

With some investment returns likely falling as far as 15 percent, states are going to face a cumulative pension debt of between $1.5 trillion and $2 trillion by the end of the year.

|

Even after an impressive bull run on the stock market, state pension funds across the country were facing more than $1 trillion in unfunded debts even before the COVID-19 pandemic struck.

Now, the gap between what pension funds have promised to current workers and retirees and the funds available to make those payments is expected to grow—perhaps quite dramatically.

With some investment returns likely declining by as much as 15 percent this year, thanks to the COVID-19 pandemic, states are going to face a cumulative pension debt of between $1.5 trillion and $2 trillion by the end of the year. That's according to separate estimates released this week, first by Reason Foundation (which publishes this Reason) and shortly after by the Pew Charitable Trusts.

But the aggregate numbers are only so useful. Some state pension systems were nearly fully funded before the current crisis, and therefore figure to be in better shape to survive it without major problems. States like Kentucky, Illinois, and New Jersey were already in terrible shape are now facing a serious crisis.

"Worse, this is coming after a decadelong bull run in the markets where pensions failed to gain much, if any, ground in terms of funding after the last downturn," says Len Gilroy, managing director of the Reason Foundation's Pension Integrity Project. "It's becoming apparent that we've just experienced a Lost Decade for public pension solvency and that policy makers will need to abandon the failed myth that they can invest their way out of this problem."

We won't know for sure how badly state pension systems got whacked by the coronavirus-induced economic crash until later in the year, but a new tool released by the Reason Foundation's pension integrity project offers a glimpse into the potential damage. Using current data from state pension plans and forecasted investment losses, the tool estimates how much more debt states could be facing by the end of the year.

If its investments lose 15 percent this year, for example, New Jersey's teachers' pension system would find itself with a mere 30 percent of the assets necessary to cover its long-term costs, and with an unfunded liability of more than $40 billion. Illinois' teachers pension plan would be more than $75 billion in the red if it sees similar losses this year.

The economic downturn creates a one-two punch for state pensions. Because of the way most public pension funds are structured, lower-than-anticipated investment returns must be made up with tax dollars. But, now, states are also expecting steep drops in tax revenue.

Already, those prospects are causing some state officials to seek a federal bailout. New Jersey State Senate President Stephen Sweeney has called for the feds to offer low-interest loans to states facing severe pension problems.

But federal taxpayers shouldn't be on the hook to pay for states' mistakes. There have been plenty of warning signs that public pension systems were in trouble.

"Public pension systems may be more vulnerable to an economic downturn than they have ever been," Greg Mennis, Susan Banta, and David Draine, three researchers at the Harvard Kennedy School, concluded in a 2018 analysis that "stress tested" each state's pension system.

Even if annual returns averaged 5 percent, they found, some deeply indebted pension plans in places such as Kentucky and New Jersey would face insolvency. A major economic downturn would be enough to force middle-of-the-road states like Colorado, Ohio, and Pennsylvania to require taxpayer-funded contributions that "may be unaffordable" to avoid insolvency, they wrote.

For years, states have been warned to stop making unrealistic promises about investment returns—a trick used to make shortfalls look smaller than they really are—and to fully fund their retirement systems instead of deferring payments to later years. Both strategies are widespread in state pension systems, and both have contributed to the mess that states now face. Policy makers have clung to the belief that reforms were unnecessary because future investment growth would close the funding gaps.

That idea should now be dispelled. Even a decade of growth wasn't enough for many pensions to fully recover from the last recession—and that should have been a warning right there, if policy makers were paying attention. Now, the deluge.

NEXT: Review: Beastie Boys Story

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. And the taxpayers are going to bail them out. Just like we kept them funded. The kingsmen have no regard for the peasants and surfs that enable their existence. Just that no matter how much they tribute it’s never enough.

    1. We’ll see how taxpayers feel when those pensions are bailed out while the inevitable cuts happen to SS and Medicare.

      1. Change Your Life Right Now! Work From Comfort Of Your Home And Receive Your First Paycheck Within A Week. No Experience Needed, No Boss Over Your Shoulder… Say Goodbye To Your Old Job! Limited Number Of Spots Open…
        Find out how HERE……More here

        1. Well, I’m a retired public employee but no public pension. My wife and I saved heavily maxing out our defined contribution plans annually for many years. Now we’re able to weather this economic disaster and remain retired.

          So take your job offer and shove it….. or maybe start calling those former public employees who are retired on defined benefit plans and offer them gainful employment from home. Lord knows they will need it.

    2. Serfing USA by that Bitch, Boise.

    3. Surfs? Auto-spell-check? Ignorance? Carelessness?

      Whichever, thank you very much.

    4. If private sector plans were funded at the level these state plans are, the trustees would be sued by the US Dept. of Labor and could face jail terms. The politicians promise generous benefits to public employees in exchange for their votes, but never follow through with adequate funding.

  2. Is there any reason to believe states won’t get a bailout?

    Think of the children!

    1. None.

    2. Thinking of the children would be the best argument for no bailouts.

  3. Already, those prospects are causing some state officials to seek a federal bailout. New Jersey State Senate President Stephen Sweeney has called for the feds to offer low-interest loans to states facing severe pension problems.

    NO BAILOUTS FOR PUBLIC SECTOR UNIONS. THEY BLED US DRY.

    1. Money printer go Brrrrrrrrr. Ha, ha, ha.

      It’s going to be interesting, getting taxpayers in a state like Georgia or Arizona to agree to use their federal tax dollars to bail out CA, IL, MA, and the others’ public pension systems. Still going to happen though.

      I think we’re in the ‘Burning Silicon’ stage of our stellar economy’s life cycle. Not long until Iron…

      1. It’s in the pipe. Feds pumping money to give these hedgefunds and banks time to dump their toxic assets and solidify their positions before the market Chernobyl happens. Which will occur right around quarterlies get released.

      2. And 30 seconds after we burn that first atom of iron, that’s it.

        1. Big Bada-Boom!!

          It’ll be interesting to see what new elements get created in its wake.

      3. I think this issue could lead to a civil war.

    2. I doubt I’ll change your mind commenter xy, but I’ll try. I am a state employee. 1). They discontinued pensions in 1987 or so in Michigan and while I don’t have stats about all states, I’m pretty sure many states discontinued them also. 2). A pension is a reasonable benefit, and in my state, we contribute to it via payroll tax. If you think privatization is cheaper most of the time, do a lot more research. 3). My state and all states spend millions on all kind of projects and contracts such as giving 50 million to a billionaire to build a baseball stadium. It sounds kind of hollow to say the state can’t pay its employees. 4). The job is a lot harder than you think. I worked 33 yrs in welfare, and we had people come from various private agencies who quit and went back even though it was less money. There’s a lot more but I hit the highlights.

      1. Clarification – discontinued pensions for people hired after approx 1987

      2. I was a police officer for 35 years, and in my experience you are totally correct. At least my state has had the sense to make contributions to the system as time went on, so it is NOT facing a crisi.

      3. 3). My state and all states spend millions on all kind of projects and contracts such as giving 50 million to a billionaire to build a baseball stadium. It sounds kind of hollow to say the state can’t pay its employees

        So, since the states are foolish and cronyist in other aspects, they should be the same for you all.

        No bailouts for ANY government or public employees!!!!! F ‘em.

        1. BigT – if you think that it is foolish the so be it. But you cant say the state can’t afford it when they have money for everything else.

        2. BigT – if you think that it is foolish the so be it. I won’t change your mind. But you cant say the state can’t afford it when they have money for everything else.

  4. My county has two active cases of coronavirus, both under quarantine, with one hitting the 14-day mark Tuesday, the other on Friday. This out of a population of about 80,000.
    When there were actual active cases being discovered, there were social distancing rules but no fines. Now it is mandatory to wear an approved face covering when in public and the fine is $1000 and possible jail time (but they are releasing prisoners from the jail, so what about that?)
    It seems that the county needs revenue.

    1. Well, I think it is commendable for the county to provide all citizens with N95 masks at no cost, as they must if such a law is passed.

      1. Well now that’s just silly. The masks don’t actually need to work. They just need to show everyone’s commitment to solidarity because we are all in this together and you don’t know if you’re sick and look at Italy and people are dying and don’t be a covidiot and………

        1. Exactly. My wife and I gave our local rural hospital our box of N95s and we still wear a mask in public to reassure those who are afraid that we all care for their physical and mental wellbeing. We don’t care at all, but want to avoid confrontation. And the $1000 fine.

    2. Is that Harris Country, where the Judge issuing the order says that just wearing a scarf or bandanna will be okay?

      How about if I pull my t-shirt up over my face, Judge, will that be good enough?

      If she thinks she can order mandatory masks, someone thinking they can order mandatory burquas is not far behind.

      1. Irony, considering Ramadan starts today at sunset. LOL at enforcing social distancing then.

      2. I know, I live just across the line in Fort Bend (literally 100 meters). I have to worry during my bike ride on the bayou if I cross that line will the deputies chase me down?

      3. Pull up your t-shirt over your face?

        Isn’t that what you do just before saying, “This is a stickup”?

    3. Consider yourself lucky. My county has a lot more than that.

  5. But shouldn’t the pension plans also be helped,going forward, because teacher salaries will plunge this year due to layoffs?
    Oh, that’s right – teachers will be getting full salary even though they aren’t (or barely) working.

    1. I’ve noticed on my social media that teachers (I know 6 or 7 at least) seem to be leading the charge of mocking the “stupid” protesters who don’t have food or money. Of course, the leech who’s getting a government paycheck for no work and guaranteed job security is gonna be the one to talk about “why can’t people be smart and just stay at home?

    2. Most elementary school teachers are overpaid for their ability and what they do. Schools of education should be shut down..you want to teach kids..get a real degree in math or physics or engineering then apprentice as a teacher for a year…I can’t tell you how many times I had to deal with teacher for my kids who honestly I could not figure out how they had graduated from high school let alone college.

      Public education needs a serious reform…give each family X dollars per kid to educate either a home or in a private school.

      1. Titus – my mother felt the same way ——- until she became a school teacher.

      2. Public education needs a serious reform…give each family X dollars per kid to educate either a home or in a private school.

        Great!

        But teaching ain’t easy. Don’t forget all the problem kids who feel entitled to act out, and the teachers have no authority to punish them. The benefits are what are out of control, and the inability to fire the bad ones. School boards can’t reward the good ones either, except by giving them ‘added duties’ like coaching volleyball or chess club.

      3. TEACHERS? Are OVERPAID?
        You must not live in Arizona.
        Even w/cost of living adjustment, most need a second job to support a family.
        What income level are you referring to with your statement, may I ask?
        What city/state?
        PS. I’m not a teacher. I WOULD HAVE BEEN a teacher, had I wanted to live in poverty and/or take a second job so that I could afford raising two kids/athletes (playing football on a high school team = almost $1K out of pocket/year, not including things like $150/pair cleats. Girls’ league softball, even more. CRAZY), which I didn’t.
        Both my kids got scholarships, hopefully one of them will become famous & support their mama.
        Otherwise looks like state-funded old folks home for me.
        Oh yeah, at the height of my career I was earning $225K+/year.
        Average year = $150K.
        After legal costs which drained my bank account, and an expensive divorce, NADA.

  6. Lol Boomers are losing their pensions.

    1. We are not losing our pensions; just the value of our 401k plans, And that will come back; maybe even before we die.

    2. yes I love it

    3. defined benefit=pension
      defined contribution=retirement plan

      learn the difference young’n

  7. Try going out in public without pants. They will not pay for pants either.

  8. Yeah, I’m going to agree with the consensus that we’ll all be bailing them out.

  9. My magic 8-ball says “inflation likely”.

    1. Said that along with lots of economists when QE started during Great Recession.

      What happened?

  10. Masks are the mark of tyranny.

    All these laws are repugnant to the constitution. I do not comply.

    1. Masks are the mark of patriotic citizens caring about their fellow citizens and their country. If you do not comply, especially if this is the law where you are, then your behavior is the mark of anarchy.

  11. federal taxpayers shouldn’t be on the hook to pay for states’ mistakes.

    “We’re all in this together!™”

    1. Nah. It takes a village.

      Screw the kids of today. I’ll be gone by the time the shit hits the fan.

      Credit is grand!

  12. Good things only wreck what’s fucked up.

    Look at your hands. They are the economy. Healthy hands work. The economy is our ability to work.

    We’re on vacation. We’ll be back to work.

    1. “Look at your hands. They are the economy. Healthy hands work. The economy is our ability to work.”

      You’re full if shit.

      1. No, sitting in your parents basement eating pizza pockets doesn’t help the economy.

        1. Which has zero to do with your asinine claim

    2. We’ll be back to work.

      And work makes them free, right stormfag?

      1. Yeah it does shitfag unless you’re into starvation.

        1. WHOOOOOOOOOOOSH

          1. “Never happened!”

              1. Scaredy-bigots.

  13. Fuck ’em. They dug their hole, now they can sleep in it. If the feds bail out the state pensions, they need to do it only if the states agree to terms, such as outlawing government pensions going forward, and reneging on that means they owe the feds the money back.

    1. HA, good one. No, they will get the bailout on their terms, or they will get nothing because there’s literally zero money left to go around. Just massive IOUs.

      There’s only one way this ends, and that’s the entire thing burning to the ground.

  14. No, state pension systems wrecked state pension systems. Or more accurately, pub-sec unions wrecked state pension systems. COVID-19 was merely a piece of grit that got into the dodgy machinery.

    1. In CA where I live “State” means “local” as well in many jurisdictions. CALPERS is one and the same.

      In many municipalities and counties, the required contributions eat up more than half the operating budgets of the local entity. After the current fiasco, only bankruptcy will save many. And that is if the “California Rule” is to be retried and found incorrect.

      Good luck with that.

      So many are about to find out that there ain’t no such thing as a free lunch. The results won’t be pretty.

      Too many will follow AOC and Sanders and take outrage at “the rich”. Revolution will follow.

    2. Care to elaborate Diane? Perhaps you mean by negotiating for high benefits? Nope, we can’t strike by law. There is literally nothing public unions can do if the state says “no” .

    3. Care to elaborate Diane?

    4. Please elaborate how unions wrecked the pension system Diane.

  15. need better money managers.

  16. Reminds me of that episode where Stewie trades the foul ball for the kids bat, then beats the kid with the bat and takes the ball too.

  17. If pensions were the only victims, we’d all be far better than we’re going to be in 6 months.
    Venezuela was supposed to be a warning, not an instruction manual, and poor Newsom didn’t get the memo.

    1. Oh, in Libertarian form, he made sure to get the word out that he had something “extra” for the undocumented.

  18. Extravagant government pay and benefits have long needed to be brought down to parity, or given their security advantage to below parity, with those of the private sector. It is both fiscally and culturally disastrous for a free republic to have this aristocracy, in all but name.

    1. Big give – I can’t speak for all government jobs, but yes, my job at welfare paid fairly well. But I have to tell you, we had people come from Catholic & Lutheran services for the better pay and it was so grueling, every one of them quit and went back. Another thing that may surprise you – the state employer always told the union at least in my state — that we couldnt get bonuses etc because we weren’t private industry. Then when the economy went south, we were told that private industry cut out “x” benefit or reduced salaries so we would too. The employer wanted it both ways in other words. Last, I’m tired of state employees being told they are “extravagantly” paid. Some of us get good pay but no state employee gets a million dollar salary or more like the auto or oil company execs and tax breaks are paid for by taxpayers too! Are you just as stridently opposed to people like Steve Bezos of Amazon who made billions and paid ZERO Federal tax?

      1. There are state employees who make millions in salary—college football coaches.

        1. I do not believe a football coach working for a university is a state employee in the way I was referring to state employees. Even if he is, there are far more private sector employees making millions than state ones.

      2. I think you need to compare yourself with the 99% of private sector professional employees..they don’t get a pension, they get a 401k, they have to pay a ton for health insurance and they have to work till they are 68 now..not 50. Oh and they can be laid off. Govt is a cost not a jobs program for folks who avoid the private sector..

        1. Titus – I am near retirement and many of my friends have pensions who worked various places other than government. New employees get a 401k as you advocate. My state stopped offering pensions in 1987 – 2 years after I started. There are other things to consider – I was discussing copays for Rx with a friend and his was 40 while mine was 20. He was miffed a bit and I reminded him that he made 3 times what I did. The taxpayers pay regardless. If functions currently done by government employees are privatized it is seldom cheaper. What happens is the workers doing the job get paid less and the contractor or stockholders of the company make all the money. Do you really want a race to the bottom where everyone is poor?

          1. When they start closing failing public schools, get back to me. Until then you’ve got no argument.

            1. BigT – what do failing schools have to do with the myriad hidden costs of privatization?

      3. AMZN made billions and didn’t pay fed income taxes.

        And, even if AMZN had been paying federal taxes all along, it would only have been a business cost passed on to their customers through product pricing.

        Bezos? Not so much.

        When are the economically ignorant going to realize that corporations and corporate founders and shareholders are not one and the same?

        1. You’re kidding – trouble is most corporations lobby for loopholes etc to not pay taxes. So their lack of participation is a cost just as much as government employees are a cost.

          1. And if Amazon shouldn’t pay taxes on billions in profit why should anyone else pay? I obviously make a tiny fraction of that and I pay. And I’ve heard that bit about passing on taxes as a cost of doing business to the consumer. Ultimately yes but in order to stay competitive the market dictates the price, right? So at the end of the day, a profit is made. So taxes should be paid or does that just leave more for Steve?

          2. And if Amazon shouldn’t pay taxes on billions in profit why should anyone else pay? I obviously make a tiny fraction of that and I pay. And I’ve heard that bit about passing on taxes as a cost of doing business to the consumer. Ultimately yes but in order to stay competitive the market dictates the price, right? So at the end of the day, a profit is made. So taxes should be paid or does that just leave more for Steve B?

            1. Don’t blame AMZN for not paying taxes, blame politicians who design the system and give companies tax breaks. They buy your votes with money for education and AMZN’s support with tax breaks. Cronyism ain’t just for private industry.

  19. there would be no problems with the gangster style pensions if the people would not be able to collect them until 65 not 42 years old. problem solved

  20. Covid-19 has NOTHING TO do with it. This was happening long before COVID. It’s about bad investments and the shifting of pension funds into the “State CAFR” (Comprehensive Annual Financial Report) and hiding the money there, borrowing from the funds and adding the money to sunny day funds, essentially robbing the pension funds legally and calling it a day. COVID -19 IS NOTHING BUT AN EXCUSE /COVER-UP

    1. Every time the stock market takes a hit, you get these “the pension systems are too greedy” claims from politicians and their sycophants.
      The politicians rely on good investment returns, so that they don’t have to make their share of the contributions needed to keep the system solvent. When the investments don’t pan out, instead of doing what they should do, they whine about it because they have spent the money, that they should have put into the system, on other vote-buying schemes.
      P.S. the politicians DON’T give public sector employees better pensions because they want their unions’ votes or contributions – those are a drop in the bucket. They do it so that they can defer those costs into the future, in lieu of raising the salaries, now. Believing that they won’t be around when the bills become due.

  21. Many (most?) state pension systems are indexed to the CPI and backed by taxpayer guarantees. Wish my corporate pension was that secure. (and yes, I’m aware of the now bankrupt PBGC) Something has to give when taxpayers fury is roused. It won’t be pretty.

  22. Punish those states with a balanced budget and reward those states that were irresponsible.
    Yes, that is the socialist way.

  23. What does it matter? The courts never let the states reduce pension benefits anyway. All other services will suffer first.

    Sadly, we need one of these pension systems to actually collapse or be unable to pay out benefits before serious reform can occur. As long as they can count on taking money from other services that won’t happen.

  24. First point is, I find it ironic how many Police support and vote for Trump, but pull the democratic lever in their states and cities.

    1. I am a retired police officer. I voted for Hillary Clinton, and would do so again. Trump has been the worst President in my lifetime, to include Richard Nixon.
      Local elections in my city are without party designation, not that it really matters.

      1. How old were you when you retired? Do you pay for healthcare? How much is your pension annually compared to your annual salary when you worked? Sorry you guys need a 401K like everyone else and pay for a good portion of your healthcare…govt workers pensions are ridiculous..

      2. Mike, I am sympathetic. Also would wonder what state you are in. All politics are local. Fox News has police stories everyday, to the point where its almost a joke. But when it comes to ones salary and pension, the democrats are your chosen ones. It amazes me in NJ, how many elected officials are “retired” public employees. We have one guy here, he has 3 government jobs and works for a private firm that gets lots of tax money.

  25. To add, what Pension and healthcare reforms will come from this?
    -Here in NJ Health Care plans are about $38k a year.
    -We have 70% more per capita police
    -Hoboken NJ has ONLY about 40% of its students in traditional public schools.
    -We have $250 BILLION in unfunded liabilities.
    -The state was to put some $6B into the pension fund this FY.
    So, no, we dont need any money and dont need any layoffs. We need REFORMS.

  26. This is just another reason why government pension systems should NOT be dependent on the stock market, but should also be a part of a state and/or locality’s annual budget. Those who spend their entire career in public service should not be subject to the highs and lows of the stock market when they are least able to withstand and afford it.
    As a retired police officer, I have a bad back, a modest house that had to be refinanced so my daughter could go to college, and considerably reduced health care benefits –at an increased price–than I did when I was still on the department. And I have two part time jobs to cover my bills–or I did, until the COVID situation hit. But nobody is hiring charter coaches now. Yes, I put aside money on my own when I could–but when I went years between miniscule raises, that got difficult. I drove my last Nissan for 13 years and 170,000 miles before I had to replace it. You don’t see many cops or teachers getting new cars every few years. We can’t afford it.
    Instead of whining about the cost of bailing out our pension systems, how about thanking for spending a career doing what we did.

    1. Are you in NY? Teachers here are driving 40K SUVs..they don’t have to pay a dime for healthcare, can’t be fired and retire after 25 years at close to 100K per year till they croak. Please govt workers are always complaining and asking for more…you got kids in college..so do I and I’ll be working till I”m 70…to help them pay off their loans. The horse is the private sector..the cart is govt.

    2. Well Mike, welcome to the world that all the rest of the world faces. Those that don’t have all those taxpayer subsidized, wonderful benefits .

      Don’t get me wrong. I tend to be supportive of the police and other public employees. But they’ve gotten benefits beyond reason for so long, that they’ve lost perspective on pay, benefits and personal responsibility and choices.

  27. You made your bed by allowing the govt sector unions to run the state and commit to massive pensions, you then didn’t fund the pensions to spend the tax dollars on other programs and now you want other people to bail out out? No the govt workers need a pension cut and a 401K going forward. The bond holders need a hair cut so they never buy bonds from these commie states..govt workers are not entitled to anything more than the private sector gets….

    1. Titus – I’ve tried to discuss politely until now but if you think public sector unions “ran state government” you are either a fool or prevaricating. Your post further implies “excessive” pensions are the cause of everything wrong with state budgets. Get real and do some research.

  28. Just about everyone here would agree that the reason for the whole pension crisis is squanderbust government. And that was a term that was used seven decades ago, when governments were smaller. And the biggest problem with the size of state government funding is it is funding largely obsolete education programs. The market has come up with solutions that are better than what schools can provide – there are a lot of independent materials that teach kids to read, and programs like Khan Academy do a better job of teaching STEM than most instructors can do. With these massive unfunded liabilities, how are states going to pay for this? Not from “the rich” – they’ll just go to different states. States are going to have to learn to do more with less – and a one-time $49.99 video purchase that teaches young kids to read in an entertaining manner is a lot cheaper than the $2,000 in extra property taxes necessary to pay for those instructors who do about as good of a job.

  29. i expect a bailout with reforms for two reasons:

    -telling my 92 year old retired 3rd grade teacher that instead of her $38k/yr pension she gets nothing is not politically viable
    -telling the taxpayers they have to pony up so some hack can keep his six figure guaranteed pension is also not politically viable

    they will bail out and institute a “fair” cap that is some politically nice sounding number like $75k or something

Please to post comments

Comments are closed.