It’s no secret that U.S. public pensions are in danger. A recent report released by the Pew Center on States found that the deficits in U.S. state employee pension funds grew by 26 percent in fiscal 2009. State by state, even larger deficits can be seen.
State governments have struggled to manage their budgets for some time, leaving less money to run a number of programs—retiree pension funds just happen to be among many victims. But with so many governments having little to pay their retirees, what will happen to their pensions?
States’ Budget Issues Trickle Down to Pensions
Public pensions are typically known as defined benefit plans because they are funded and regulated under public law and guarantee a certain payout at retirement, according to a fixed formula that usually depends on a member’s salary and the number of years a member has been with a plan.
They are different from defined contribution plans, which include 401(k) and Individual Retirement Accounts (IRAs), which require individuals to make contributions into the plans.
Since public pensions are funded by local or state governmental bodies, it is up to those bodies to ensure enough money is available to pay current workers upon retirement for their services.
The only problem is that many state budgets are in trouble and have been for a while–even prior to the recession. Of course, the financial crisis didn’t help matters any. The tougher economic times forced states to dig themselves into a hole that left them unable to make up for previous deficits. This meant they were forced to contribute even less into pension funds.
To make up for the problem, many governments began using available money to pay more into existing workers’ public funds while rolling back on new workers. Also, they planned to sell assets and make deep cuts to services.
Pensions Near $2.5 Trillion Deficit as Funds Run Out of Money
Despite efforts by governments to fix their budget issues, the retirement pension deficits have been growing. In fact, in 2009 the deficit in pension funds grew to $1.26 trillion. What’s worse is that the Pew Study predicts pension funds could see a deficit of $2.5 trillion in the near future.
Some states have had more issues than others. For instance, Illinois, West Virginia and New Hampshire had deficits of 51 percent, 56 percent and 58 percent, respectively, while New York and Wisconsin actually had enough money to pay their retirees in full in 2009.
In 2010, Joshua Rauh, a professor at the Kellogg School of Management at Northwestern University, released a paper titled “Are State Public Pensions Sustainable? Why the Federal Government Should Worry about State Pension Liabilities.” In the paper, he listed the states that will run out of pension funds the soonest and in what year it will occur:
- West Virginia (2024)
- New Hampshire (2022)
- Kentucky (2022)
- Kansas (2022)
- Colorado (2022)
- Oklahoma (2020)
- Louisiana (2020)
- Hawaii (2020)
- New Jersey (2019)
- Indiana (2019)
- Connecticut (2019)
- Illinois (2018)
The good news is that five states are never expected to see their funds run dry. They are Alaska, Florida, Nevada, North Carolina and New York. But other states are scrambling to figure out what to do before their money runs out.
Can States Fix the Problem?
So is there a solution to the dilemma most states are facing? Many would suggest that the Federal government get involved to conduct a sort of bailout similar to what major companies like General Motors and Fannie Mae received years ago.
The government has made it clear that it is not interested in dishing out anymore bailouts. But this hasn’t stopped states from asking.
California, where about 80 percent of the budget goes to paying for state workers, has already asked for an $8 billion bailout, which lawmakers refused. This may be because the Federal government has its issues to deal with, having just reached the debt ceiling of $14.3 trillion.
So it appears states will have to go at it on their own. Some have already made attempts:
- New Jersey: Gov. Chris Christie in New Jersey is attempting to cut the pension deficit by $46 billion by rolling back a previous raise in retirement benefits.
- Maryland: The state’s pension commission has proposed to increase the years of service needed from five years to 15 years in order to qualify for retirement benefits.
- Virginia: In Virginia, Gov. Bob McDonnell is asking state workers to contribute 5 percent of their pay to the state’s pension system.
- New York: Though New York workers don’t have the same pension fears as other states, Gov. Andrew Cuomo has proposed to make adjustments to the pension system to save money. He wants to increase the retirement age to 65, end early retirement, force employees to pay twice as much into their pensions and end the “padding” of pensions through overtime pay, sick time and other means. This proposal would only apply to new workers.
Because state pension funds appear to be as unpredictable as Social Security, it’s good idea for retirees looking to receive a public pension to create their own backup retirement planning options to avoid relying on government assistance after leaving their jobs.
By learning how to invest for retirement, workers can feel comfortable that their financial fate will be left in their own hands.
