States Digging $1 Trillion Pension Hole, Pew Center Says

Rising liabilities, lagging asset growth rates and inadequate legislative action by many states have produced a $1 trillion gap for public pension, retiree health and other retirement benefits, according to a study issued Thursday, February 18, by the Pew Center on the States.

The Washington-based policy research organization paints a steadily deteriorating portrait among many states whose ability to finance public pension and health programs has fallen well behind the promises made to their citizens.

“What we found was truly troubling,” said Susan K. Urahn, managing director for the Pew Center, in a conference call with reporters. “This is a conservative estimate.”

The states have a combined $2.35 trillion in assets for pensions, health care and non-pension retirement programs for current and retired workers, but they need another $1 trillion to match their liabilities, according to the Pew Center report. Although some states have taken steps to reform public benefits systems, Urahn chided politicians for having “kicked the can down the road” by letting the liability-asset gap widen even when the economy was healthy.

“This problem was not created by the Great Recession,” she said. “[Legislators] need to take action now.” Otherwise, pension and health liabilities will “ultimately crowd out other services” and could force states to raise taxes, she added.

Citing actions by some states, the Pew Center report recommended several reforms:

• Maintain annual funding requirements and make sure investment assumptions aren’t overly optimistic;
• Reduce benefits for new employees by raising the retirement age or altering the pension formula;
• Require employees to make a larger contribution to retirement plans; and
• Improve management and oversight of state pension plans.

Filed by Robert Steyer of Pensions & Investments, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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