Our nation’s state and local pension system is broken.
State and local public pensions are now underfunded by a whopping $5.6 trillion dollars. When combined to include all states, the cost of unfunded pension liabilities comes to about $17,427 for every single person in the United States.
Unfunded liabilities, or the amount of money states promise workers for their pensions yet cannot afford to pay out, are a growing threat to our fiscal solvency.
According to a new study from the Hoover Institution, “almost no state or local government is running a balanced budget.”
Hoover Institution Senior Fellow Joshua Rauh elaborates,
While state and local governments across the U.S. largely claimed they ran balanced budgets, in fact they ran deficits through their pension systems of $167 billion…the study reveals the fact that state and local government budgets are far from balanced when one considers pension promises.
Unfunded pension liabilities are no longer something we can ignore – they are a serious threat to state budgets and to young taxpayers.
What Does This Mean for Millennials?
“Those most likely to be hurt and hurt the most [by underfunded pension plans] are retirees and taxpayers,” notes Mark Sievers, president of Epsilon Financial Group.
There is no question these groups will be affected. But they are not alone. Underfunded pensions also threaten another group: young adults and future generations of taxpayers.
The cost of states’ underfunded pensions creeps higher and higher each year. In the past year alone, unfunded pension liabilities have increased by $434 billion dollars. Refusing to address the issue places the burden of addressing growing pension debts on the next generation of taxpayers.
Illinois Policy Institute also highlights the plight of younger workers in government: “younger government workers are also trapped in state and city pension systems, forced to pay into broken funds from which they may never see benefits.”
Unfunded pension liabilities also hurt millennials in other ways: they consume tax dollars which would otherwise be used for public goods like higher-education spending.
A report from the Manhattan Institute notes,
Over the past several years, total state expenditures have increased, on average across the U.S., and pension expenditures and liabilities) have increased the most – by an average of 61% between 2008 and 2015. But states decreased per-student higher-education spending by an average of 22.4% over the same period.
The Need for Pension Reform
Unfunded pension liabilities are a ticking time bomb.
Take the Garden State, for example. New Jersey presently has $235 billion in unfunded pension liabilities – that is $26,000 owed for each man, woman, and child in the state – and the first fund becomes insolvent in just four years.
Illinois Policy Institute emphasizes a major weakness of pension plans: “If funds don’t have enough money to pay out future benefits, it’s taxpayers who must bail them out.”
A recent editorial from Investor’s Business Daily poses solutions,
Pension systems across the U.S. will have to do one of two things: Find more money to fund the expected payouts, or slash pension spending on future retirees – or some combination of the two. None of the choices is appealing…real reforms can be made, starting with cutting back on lavish pension promises…while encouraging public-sector workers to do more of the actual saving for their retirements than they now do.
State governments need to become more efficient and effective custodians of our tax dollars. One way for the states to do this is by doubling-down on efforts to eliminate wasteful spending and cut unnecessary programs.