Pension Shortfalls All Around

In a report released Thursday, the Pew Center on the States tells us that the states are facing an estimated $1 trillion shortfall in their pension funds.  Even more alarming is the fact that of the additional benefits promised to pensioners of state governments, things like health care, “only 5 percent of the $587 billion total liability they have is funded.”

A healthy pension fund would be one in which the level of funding is equal to 80 percent or more of its liability.  Twenty-one states were below that level in fiscal year 2008, which for most states ended midway through the year.  This precluded the inclusion of losses to state pension portfolios during the latter part of 2008, but which will be reflected in the as-of-yet unreleased numbers for fiscal year 2009.

Mark Scolforo, writer for the Associated Press:

The exploding financial burden could be a bitter pill for taxpayers, many of whom will not be collecting similar pensions or other benefits when they retire, said David Kline with the California Taxpayers’ Association. About one in five private sector workers have traditional defined benefit pensions, compared with about 90 percent of public-sector employees — including some that do not get Social Security.

In Pennsylvania, a series of decisions by the Legislature and governor have shielded taxpayers from much of the pain for the past decade, but costs of less than $1 billion a year now is projected to climb to about $6 billion annually in the coming three years.

The report said policy makers have exacerbated the problem by expanding benefits, relying on overly optimistic assumptions about investment returns and failing to sufficient fund the programs.

“Even though the actuaries tell the states what they should be doing, the states feel free to ignore that,” said Olivia Mitchell, director of the Pension Research Council at the University of Pennsylvania’s Wharton School. “So putting some teeth behind the requirements is really the problem.”

Pew said states should consider changes that have proven to be effective and politically viable. Among them: setting minimum contribution levels that are actuarially sound, sharing some of the investment risk with employees, cutting benefits, increasing the minimum retirement age, making employees pay more into the system and providing more robust oversight and investment rules.

Remember, this is just the states, and the liabilities are rising.  The federal government too has employee pay problems as well as employee pension problems.

The average federal civilian worker made $119,000 in 2008 when combining wages and benefits, while the average private sector compensation was only $59,000.  When just wages are taken into account, the numbers are $79,197 for federal workers v. $50,028 for private sector employees.  As mentioned above, only a fraction of private sector retirees have any sort of job-related defined benefit pension, while the majority of federal workers receive pensions that allow retirement 10-25 years earlier than private sector employees.  This could mean 50+ years of pension for 20 years of work.

According to the Obama administration, 153,000 new federal workers will be added to the payroll in 2010, boosting the number of federal workers to 2.15 million for the first time in history.

The generous pay, benefit, and retirement plans of state and federal workers are going to need to be financed by someone.  Because the public sector exists only through the labor and resources of private citizens and corporations, taxes will need to be increased on those citizens and corporations in order to pay the escalating expenses of an ever-expanding bureaucracy.

Remember, the private sector, on whom this burden will fall, isn’t provided such generous benefits and salaries because it’s not economically feasible.  Private companies can’t spend more than they make for very long and still stay in business.  This is also the sector which will need to save for their own retirement, with whatever funds remain in their paychecks after providing those government employee benefits they themselves don’t have access to.  When did government “service” become government largess (or public largess)?

In the middle of the greatest economic slowdown in generations, the federal and state governments increase their liabilities for decades to come with larger payrolls, benefits, and pensions obligations, thus necessitating higher taxes and leading to greater stagnation in the private sector.


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