With state and local spending overruns having prompted officials to take a second look at current spending levels and future obligations, what has become apparent is that the current Ponzi-style, defined benefit pension system employed by many states poses the greatest threat to state austerity.
Looking to avoid politically difficult but necessary pension reform, states have been borrowing money, issuing bonds, estimating unreasonable returns, and cooking the books to hide their pension liabilities. Applying private-sector accounting practices to state pension funds reveals an enormous discrepancy between state’s publicized and actual liabilities.
Total underfunding of public employee pensions
- State and local government pension underfunding is $3.04 trillion
- Public school teachers’ pension underfunding totals about $933 billion
- California’s government pensions are underfunded by $535 billion—that’s six times its annual state budget; $35,000 for every household in the California; and more than the gross domestic product of Saudi Arabia, Sweden, Switzerland or Poland.
- State and local pension plans have only a 16 percent probability of being able to cover accrued benefit liabilities with current assets.
Government workers receive generous pensions, driving up costs
A key factor in the underfunding of government employee pensions is the inflated benefits promised to individual workers. On average, government workers with defined benefit plans are owed $2.85 in retirement benefits per hour worked compared to a private sector worker with a defined benefit pension plan who receives $0.41 in pension benefits per hour worked.
Reform is difficult and easily demonized
The biggest opponents to pension reform are the current recipients of generous pension benefits, many of which are union members. Over 35 percent of government workers are represented by a union compared to 7 percent of private sector workers. Furthermore, pension benefits are guaranteed by law or state constitution giving current government unions and workers little incentive to renegotiate their contracts.
States should shift to defined-contribution retirement plans
The current public pension structure is unsustainable and unfair. Switching to defined contribution pension plans—as a majority of the private sector businesses and a number of states have already done—would preserve worker’s retirements and alleviate the government’s burden on taxpayers.