Pew report on Underfunded Retirement Systems

The Pew Center on the States published the The Trillion Dollar Gap: Underfunded State Retirement Systems and the Road to Reform”:

$1 trillion. That’s the gap at the end of fiscal year 2008 between the $2.35 trillion states had set aside to pay for employees’ retirement benefits and the $3.35 trillion price tag of those promises.

Why does it matter? Because every dollar spent to reduce the unfunded retirement liability cannot be used for education, public safety and other needs. Ultimately, taxpayers could face higher taxes or cuts in essential public services…

To a significant degree, the $1 trillion reflects states’ own policy choices and lack of discipline:

  • 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.

The Pew Report says that the Alabama Retirement System “needs improvement” (Alabama doesn’t fund accrued liabilities at the GAO-recommended percentage – we’re at 77% instead of 80% making us a “laggard in state pension funding”).  Overall on the pension side, Alabama doesn’t rate as a “solid performer” in any category, but we’re not that bad, and we don’t rate “serious concerns” in any category.

The report notes that our 2008 State Retirement “latest liability” is $40,206,232,000.  Our “latest unfunded liability” is $9.2B.  Our “annual required contribution” and “latest actual contribution” was over a $1B  (we were one of the few States to meet the contributions to the penny – for example Illinois, which is in crisis, should have contributed $3.7B but only contributed $2.2B).

However, on the retiree health care side we don’t do as well:  the report notes that the State Retiree Health Care “latest liability” is about $16B with the “latest unfunded liability” at about $15.5B – this is bad.  The State’s “annual required contribution” is $1.3B and the “latest actual contribution” is $1.1B – that’s a couple of hundred million worth of bad.  Focusing only on the retiree health care funding we are in the seriously messed up category.

Some of the general recommendations Pew makes are:

“Keep up with funding requirements”
“Reducing benefits or increasing the retirement age”
“Sharing the risk with employees” (i.e, 401K)
“Increasing employee contributions”
“Governance and Investment Oversight” (i.e., Alabama’s RSA)

Some “structural issues” that “make it more difficult for states to keep up with the needs of current workers and retirees” are:

“Early retirement” (bad idea – like Huntsville’s buy-out)
“Cost of living adjustments”
“Sharing excess returns”
“Double dipping”
“Spiking final salaries”

Pew notes that dealing with public sector unions (i.e., AEA) make addressing the problem “a struggle”.  They also say that “Pension Obligation Bonds” are a bad idea (“use caution”) – think the JeffCo Sewer mess.  Another problem is that states use rosy “investment return assumptions” – Pew says Alabama assumes 8% return on investments.

Pew identifies four states as “models for success”.  Florida for “providing consistent funding”; Nebraska for “reducing risk through a cash balance plan” (like an IRA);  Iowa for “benefit caps and adjustable employee contributions”;  and Georgia for “understanding the impact of reform” (any legislation affecting retiree benefits requires an actuarial study of the long term impact).

The State pension plans included in Pew’s analysis are: “Teacher’s Retirement System”, “Employee’s Retirement System”, and “Judicial Retirement Fund”.  The State retiree health plans included are: “Retired State Employees’ Health Care Trusts” and “Retired  Education Employees’ Health Care Trust”.

The Pew report is a good read, but kind of scary.

One thought on “Pew report on Underfunded Retirement Systems

  1. This is the next looming national financial crisis.

    A majority of people are now aware of the national debt problem we face. More and more are coming to understand the entitlement crisis that is about to hit us. But very few understand that the old pension system — both public and private (guaranteed by the government, natch) — is flat broke and does not have the money to actually pay the pensions millions are depending on. When people begine to realize this, watch out.