Pew Center Survey: States Face $1 Trillion Shortfall in Retiree Benefits

(February 18, 2010) – Many states face a $1 trillion gap for public pension retiree health and non-pension retirement benefits, a new study from the Pew Center on the States showed.

“While the economic crisis and drop in investments helped create it, the trillion dollar gap is primarily the result of states’ inability to save for the future and manage the costs of their public sector retirement benefits,” said Susan Urahn, managing director of the Washington-based policy research organization, in a news release. “The growing bill coming due to states could have significant consequences for taxpayers — higher taxes, less money for public services and lower state bond ratings. States need to start exploring reforms.”

According to Pew’s report, the pension deficit will have to be paid over the next 30 years by state and local governments, amounting to more that $8,800 for each household in the US. Figures are detailed in Pew’s “The Trillion Dollar Gap” report.

Pew’s study reveals the $1 trillion gap reflects states’ policy choices and lack of discipline for:

• failing to make annual payments for pension systems at the levels recommended by their own actuaries;
• expanding benefits and offering cost-of-living increases without fully considering their long-term price tag or determining how to pay for them; and
• providing retiree health care without adequately funding it.

For example, in 2006, a mere six states had fully funded pension systems. In 2008, only Florida, New York, Washington and Wisconsin could claim fully funded pension systems. According to the report, the best funded states are New York, 107%; Florida, 101%; and Washington and Wisconsin, each at 100%. The worst funded: Illinois, 54% and Kansas, 59%, with 19 other states having less than 80% of their obligations funded.

Puerto Rico’s Employee’s Retirement System, with its 15% pension funding status, was excluded from Pew’s research.

To reduce the gap, the Pew Center report recommended:

• reducing benefits for new employees by raising the retirement age or altering the pension formula;
• requiring employees to make a larger contribution to retirement plans; and
• improving management and oversight of state pension plans.