According to a report by the American Legislative Exchange Council (ALEC), unfunded state pension liabilities in the U.S. total $5.82 trillion, equivalent to more than $17,000 for every person in the U.S. This represents a $900 billion increase from the council’s last year report.
The document surveyed more than 290 state-administered public pension plans, listing assets and liabilities within the 2011-2019 period.
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Unfunded liabilities growing among 10 key states
In the report, ALEC asserts that the cumulative growth of pension payments is putting enormous pressure on state governments, which have to relocate revenue that otherwise should be destined to essential services like public safety and education or tax relief.
Contract and state constitutional laws order state governments to make these pension payments regardless of economic conditions.
ALEC’s study has also found that the 10 states with the biggest unfunded liabilities have grown rapidly, hence increasing their share of total unfunded liabilities in the U.S.
These means that California, Illinois, Texas, Ohio, New York, New Jersey, Pennsylvania, Florida, Georgia and Massachusetts, “make up 58% of all unfunded liabilities in the country, up from 57% last year. Pension investment returns have again fallen short of assumptions in this year’s report, covering FY 2019, with an average of 6.5% return instead of the assumed 7.2%.”
“Kicking the can down the road”
Since pension plans pay all these benefits to millions of public workers, they accrue assets through worker contributions, tax revenue, and by taking on debt to pay pension promises today.
“Paying pension obligations by issuing bonds only kicks the can down the road to future taxpayers, as they will ultimately be responsible for solving the pension funding crisis,” the report states.
Still, ALEC argues that high-impact reforms could prevent unfunded liabilities from growing in the future by changing the very structure of pension plans.
Switching to a defined-contribution system
A change from defined-benefit to a defined-contribution system similar to how 401(k) plans work for employees in the private sector will “improve the health of state pension plans and give them more control over their own retirement savings.”
This could give public workers more flexibility with their retirement contributions and the opportunity to use their retirement savings in new positions or careers.
Further, a hybrid between defined-benefit and defined-contribution could help reduce unfunded liabilities per capita. This is the case of Tennessee, where a hybrid system for all new hires in July 2014 and the implementation of cautious investments contributed to pension plan solvency, setting the state with the lowest unfunded liabilities per capita.
ALEC concludes, “With sound pension reform, states can keep the promises they made to public employees to keep pensions funded.”