Pew Center Finds States Have $1 Trillion Gap In Retiree Benefits

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A new report released by the Pew Center on the States Thursday found that there is a $1 trillion gap between what all 50 states have promised their workers for their pensions and what they have actually set aside.

According to the report, at the end of fiscal year 2008, there was a $1 trillion gap between the $2.35 trillion states had set aside to pay for employees' retirement benefits and the $3.35 trillion price tag of those promises.

"While the economic crisis and drop in investments helped create it, the trillion dollar gap is primarily the result of states' inability to save for the future and manage the costs of their public sector retirement benefits," said Susan Urahn, managing director for Pew Center.

She added, "The growing bill coming due to states could have significant consequences for taxpayers—higher taxes, less money for public services and lower state bond ratings. States need to start exploring reforms."

In their assessment of how well all 50 states are managing their public sector retirement benefit obligations, Pew found that in fiscal year 2008, states' pension plans had $2.8 trillion in long-term liabilities, with more than $2.3 trillion reserved to cover those costs.

Overall, states' pension systems were 84% funded, which, according to the report, was above the 80% funding level recommended by experts. Still, this left $452 billion unfunded, and pension liabilities have grown by $323 billion since 2006, outpacing asset growth by almost $87 billion.

Meanwhile, when examining retiree health care and other non-pension benefits, the report found a $587 billion total liability to pay for current and future benefits, with only $32 billion - or just over 5% of the cost - funded as of fiscal year 2008. Half of the states account for 95% of the liability.

The report further found that momentum for policy reform is building nationwide, with 15 states passing legislation to reform their state-run retirement systems in 2009 compared to 12 in 2008 and 11 in 2007.

In addition, ten states increased the contributions that current and future employees make to their own benefit systems, while ten states lowered benefits for new employees or set in place higher retirement ages or longer service requirements.

"A growing number of policy makers recognize that their states' fiscal health depends on how well they manage the bill coming due for public sector retirement benefits," Urahn said.

She added, "We are seeing more and more states explore policy reforms aimed at putting their systems on stronger fiscal footing."

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