Public Pensions Face $1 Trillion Shortfall

US states face a $1 trillion shortfall in the funding of their pensions, and the figure could grow substantially in the near future. The Pew Center On The States reports that “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.” The research group says that if these pension are to be funded, the money will have to be taken from education, public safety, and other essential government programs. That is, if they can be funded at all.

At present, the most severe problems with pensions funding are in Connecticut, Illinois, Kansas, Rhode Island, Massachusetts, Kentucky, Oklahoma, and West Virginia. But according to some experts the problem is bound to become much larger. Orin Kramer, chairman of New Jersey’s investment council, told the Financial Times that funding gaps could be three times the Pew estimates.

The states may not be able to fund these liabilities at all. Tax receipts have been undermined by the recession. Costs in most states have gone up and some of that is due to pension obligations. Several are teetering on the brink of insolvency, including the largest state by population, California. Large Midwestern states have lost much of their manufacturing bases and with them tax receipts. The same states have chronic unemployment that could stay above 10% for years as workers try to find jobs other than the ones that they had in factories.

The Pew data means that eventually state workers and retirees may have to do with less. Similar to Americans employed in the private sector who have seen some of their retirement nest eggs which have shrunk because of the market downturn, state workers may be faced with the prospect of having to work longer and in jobs outside the ones that the state  provided them. Just two years ago, it was unimaginable that a state could renege on an obligation to pay retirement and medical benefits, but falling tax income will probably change that.

State retirees are likely to find themselves in the position of many other older American. They will be short the money they thought they would have for their golden years.

Douglas A. McIntyre