Will States Break Pension Promises?

The Pew Center on the States released new research that says “The gap between the promises states have made for public employees’ retirement benefits and the money they have set aside grew to at least $1.26 trillion in fiscal year 2009, resulting in a 26 percent increase in one year.” Pension payments and retiree health care made up most of the shortfall.

Old and sick people who hoped that they would have access to funds to support themselves are in many cases out of luck

The data doesn’t mean much unless the age of the state employees — who tend to be older than most workers —  and the future of the returns on the funds are considered. One of the problems state and municipal executives have is that actuaries estimated that returns on most pension plans would be higher than they have been. The stock market collapse in 2009 and the drop in interest rates made sure of that.

State officials have to ask themselves whether they will need to cut benefits now or cut them later. Retirees will almost certainly challenge any changes in pension payouts in court. The money that they should get for their retirements and healthcare were part of a larger deal in which they traded modest pay for tremendous benefits.

The state pension problem is not unlike the one the federal government has with Social Security and Medicare, although the obligations of the two entitlement programs to every US citizen.  Funds that were never supposed to run out of money have started to. The problems are not acute, but they will be within a few years. It is impossible to set a precise date because of the growth or shrinkage in the size of the obligation pools and the pace at which people actually retire or need medical help cannot be predicted.

States cannot go bankrupt, or at least most experts claim they cannot.   Arkansas, though, defaulted on its bonds in the 1930s.  Nothing prevents them from becoming insolvent,so the bankruptcy definition may be academic. Someone will have to pay for the aging of the population and slow growth of the economy which has had, as a by-product, a reduction in pension capital growth. Many experts expect that the burden of lower benefits will fall to the Baby Boomers, but that is probably not true. People who are in their 30s and 40s are likely to reach retirement age as pension-like programs at the state, municipal, federal, and corporate levels reach the critical levels at which they will have to renege on their promises.

It is still unimaginable to most people who believe they are due retirement and medical benefits that they may not get them. It is too much of a nightmare for some to face. A great deal has been written about old people at work into their 80s as they try to recoup their depleted retirement savings. And, if unemployment stays high for years, septuagenarians may not find jobs at all.

Like most other important problems, people assume that the government will find a way to fix them. The Federal Reserve will stimulate growth.  Congress will increase taxes. State can tax more, too. But, many pensions are too deeply in the red and that may be so for Social Security as well. There is a financial wasteland ahead for many people who will become aged in the next decade or so, and nothing can be done about it no matter how much people wish otherwise.

Douglas A. McIntyre