Making Your Money Last
Public Pensions: The Trillion-Dollar Hole
Some states are scaling back their retirement plans to help close the funding gap in their pension systems.
By Laura Cohn, Associate Editor
From Kiplinger's Personal Finance magazine, June 2010
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If you thought earning a fat pension in a public-sector job was a sure thing, think again. According to an analysis by the Pew Center on the States, state and local pension plans are operating under a massive deficit of at least $1 trillion. A separate report on 125 state plans by Wilshire Consulting found that the ratio of assets to liabilities -- the so-called funding ratio -- of state pension systems slipped from 85% in 2008 to 65% in 2009.
How did this happen? Simply put, the states weren't sufficiently diligent. They didn't make big enough payments to their pension plans, they failed to squirrel away enough money to pay retiree health benefits and, perhaps most egregious, they increased their benefits without figuring out how they would pay for them. Pew's $1-trillion figure -- tallied through the end of the 2008 fiscal year -- is conservative given that it doesn't capture the stock-market losses incurred in the second half of that year.
To help close the gap, some states are scaling back their retirement plans. According to Pew, ten states have curbed benefits to new workers or raised the retirement age. Nevada, for instance, changed the formula used to calculate pension benefits for those hired after January 1 to provide a lower payout. It also raised the retirement age for public workers from 60 to 62, starting this year. Another ten states -- including Iowa, Nebraska and New Mexico -- boosted employee contributions.
Workers are also starting to contribute or are contributing more to the health-care plans they'll get once they exit the workforce. New state workers in Kentucky, for instance, must now put 1% more of their paychecks toward their retiree health plans. Likewise, employees in Connecticut who have worked for the government for fewer than five years must contribute 3% of their salaries to such plans.
The outlook is grim. "If pension systems continue on the course they've been on, the bite out of state budgets will get bigger," says Katherine Barrett, consultant to Pew. Unlike the federal government, which controls the printing presses and can run huge deficits, states must balance their budgets. For individuals living in states with severe deficits, that could mean an increase in taxes or a reduction in public services, or both.
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Reader Comments (6)
Posted by: Brit 1 at 05/12/2010 10:13:42 AM
And how much of this pension money was siphoned off for other uses by our wonderful government? For example, Christie Whitman raided $2.7 billion (yes, billion) from the New Jersey State Employees Pension and the employees just keep being told "water under the bridge", "suck it up". Nice. It's amazing that the government bails out failing auto companies that have been ripping off the public for years, and bailing out failing corporations paying loser execs. to fail but there's no money for the working public. Pension money should be kept in the pension system for the people that have for years paid into it. What Whitman did was no better than the Enron execs. or Bernie Madoff.
Posted by: Rick at 05/12/2010 07:34:53 PM
Dear Brit, C. Whitman borrowed without voter's approval 2.8 billion.....that's 2.8 billion, and put it into the pension fund, then subsequently allowed the towns to skip their contributions thus allowing property owners a liittle relief.......this was all done after actuaries pronounced our fund solvent for years.......the reason the fund is underfunded is twofold 1. we suffered 2 catastrophic stock market crashes 2. the only reason you've been promised these crazy pensions is because of the corruption, the chance that the state can actually pay all this money is near zero.....
Posted by: JIG at 05/12/2010 11:22:54 PM
It isn't fair to make the younger crowd pay more and get less. They should spread the pain and also require retirees and those about to retire take cuts.
Posted by: Dick H. at 05/13/2010 10:06:41 AM
You mean like Social Security???
Posted by: Don at 05/13/2010 01:07:34 PM
That's how the giant Ponzi scheme of Social Security works, the last in get less from the system. I say we cut those grand retirement plans that our elected representatives have to zero. They are all millionaires anyway.
Posted by: David L at 09/17/2010 12:45:34 PM
I'd rather have the current workers fund their own pensions and the pensions of the currently retired workers than have all the tax payers fund these rediculous pensions. I'm having enough trouble putting away money for my retirement, why should it be my responsibility to fund public worker's pensions?