States’ Pension Bubble About to Break

Published May 4, 2010

Taxpayers in almost every state face huge – and in many states unbridgeable – gaps between retirement benefits promised to their state government employees and the money set aside to pay them, according to a new study from The Heartland Institute.

“The deep recession of 2008-09 has moved up the day of reckoning, requiring immediate action by many states to avoid financial catastrophe,” said the study’s co-author, Eli Lehrer, national director of the Center on Finance, Insurance, and Real Estate at Heartland.

Noting that the National Bureau of Economic Research pegged the states’ combined unfunded liability as high as $1.75 trillion in 2008, the 50-state report card identifies the pension policies and states that created the crisis, and suggests ways to relieve it.

Lehrer noted the average $39.83 per hour in wages and benefits paid to government employees exceeds private-sector compensation by about 35 percent.

But he added, “The largest single cause for the pension gap is not wages or even health insurance but rather the size of the public-sector pensions.”

The Report Card notes that only two of every 10 private-sector workers qualify for any sort of pension, while nearly eight of 10 government workers enjoy a defined benefit plan. One key result, Lehrer said, “Governments spend nearly five times more on pensions than their private-sector counterparts.”

Ten states earned a failing grade of “F” on the Report Card with Kansas at the bottom of the list. Also in the F category are Colorado, Hawaii, Illinois, Louisiana, Maine, Maryland, New Hampshire, Oklahoma, and South Carolina.

Eight states were given “A” grades, with Alaska at the top, followed by Florida, North Carolina, Washington, North Dakota, Oregon, Nebraska, and Delaware.

The grades were based on five variables that capture the types of promises states make to public-sector workers (employee contributions, choice of retirement plans, taxable benefits, time before vesting, and the employee’s earnings basis for pension). One additional variable, fund solvency, evaluated states’ abilities to keep the promises they made.

Steve Stanek, co-author of the study and managing editor of Budget & Tax News, said states can end the pension funding crisis by embracing several reforms, particularly making employees contribute more to their retirement; moving from defined-benefit plans to defined-contribution plans; taxing pension benefits; and making full funding of pension funds the highest objective of reform.

For a full copy of Heartland Policy Study No. 126, “The State Public Pension Crisis: A 50-State Report Card,” or to discuss its findings, contact Dan Miller or Tammy Nash at the Heartland Institute, (312) 377-4000 or email [email protected] or [email protected].