March 28, 2016

How to Save Public Pensions

Mark J. Warshawsky

Former Senior Research Fellow
Summary

A number of U.S. states and municipalities are facing dire fiscal situations, while many more have severely underfunded public employee pension plans. At the intersection of these two problems, the sustainability of many state and local government pension plans in their current form is highly doubtful.

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A number of U.S. states and municipalities are facing dire fiscal situations, while many more have severely underfunded public employee pension plans. At the intersection of these two problems, the sustainability of many state and local government pension plans in their current form is highly doubtful. One study calculated that pensions in 21 states had funded percentages below 40 percent in 2009. Another study found that, on average, state and local governments currently contribute 5.7 percent of annual revenue to their pension funds – but they would need to contribute 14.1 percent to fully fund the programs.

Despite the dire situation many state and local pension plans are in, conventional pension reforms are stymied by the strict legal and often constitutional protections most states grant to government workers’ pension benefits. Many seem to assume that a federal bailout of insolvent state and local pension plans is inevitable. This would lead to hundreds of billions of dollars in new federal spending to be imposed on all taxpayers and would be unfair to those who have responsibly funded retirement benefits for themselves or through their employers. Recent precedents from the Detroit municipal bankruptcy where pension cuts were made, along with new federal law allowing benefit cuts in insolvent multiemployer pension plans – with no federal government bailout in either situation – argue strongly that federal help cannot be expected.

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