Retirement benefits on the cheap in states

Taxpayers often assume state governments must budget in the black each year while Washington can wallow in red ink, printing money and selling debt to foreigners. 

Not quite true, apparently, when it comes to the budgeting of retirement benefits for state workers. 

Collectively, state governments are at least $1 trillion in the hole for paying out future pensions and healthcare benefits for retirees. That’s the conclusion of a study by a Washington think tank, the Pew Center on the States, which relied on figures only before the recent recession really hit. “What we found was truly troubling,” said Susan K. Urahn, managing director for the Pew Center. The gap may be even higher now. 

A trillion dollars is a huge burden on future generations to pay for today’s public employees. And it helps explain why state officials demanded a large chunk of the 2009 economic stimulus package and why many states want the federal government to take over healthcare. California even talks of a federal bailout for its debts, similar to that given Wall Street, mortgage giants Fannie Mae and Freddie Mac, and GM and Chrysler.

The basic problem is that many states have overpromised and underinvested on all their retirement benefits. State and local governments pay 45 percent more in salary and benefits per hour worked than private employers do while also allowing much earlier retirement. Most of that state largess is in benefits.

Such generosity is a result of public-employee unions paying handsomely into the campaign coffers of many state legislators, who may not be in office when the bill comes due for future benefits. 

Last year was the first time in US history that the number of unionized employees in government exceeded those in the private sector. Even Franklin Roosevelt warned of the perverse power of public unions to pressure government. “The process of collective bargaining, as usually understood, cannot be transplanted into the public service,” he said. 

Many states have resisted such union pressure, which helps explain why they have been able to at least rein in retirement benefits or keep up with their obligations. In 2008, four states – Florida, New York, Washington, and Wisconsin – had fully funded their future retiree pensions. They stand in contrast to 21 states that are under the recommended 80 percent of funding for their pension systems. Illinois is the worst at 54 percent.

Fortunately, about a third of the states are starting reforms, such as not making pie-in-the-sky assumptions about future financial returns on investments of their pension funds. Some states are lowering benefits for new workers, requiring employee contributions to benefit plans, or raising the retirement age. New York raised its retirement age from 55 to 62 last year for workers with 30 years of service. 

“Many state officials grasp the depth of the funding challenges for their public sector retirement benefit systems and they need to respond,” the Pew study states.

And Washington should not come to the rescue, especially with its own fiscal woes. States needed this wake-up call from Pew. Now they know what they should do.