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…Many of the public employee pension plans run by states don’t have enough money in them to make upcoming pension payments to retired state workers….The problem has been a long time coming, but COVID-19 may make it into a crisis.
…In 2017, total pension liabilities for all states was US$4.1 trillion and assets were $2.9 trillion. That means collectively, state pension funds would need $1.3 trillion to be able to make payments to everyone promised a pension. This represents about 9% of the U.S. GDP.
How did this happen?
- Pension fund investments often did not meet the return targets due to poor financial management; some states like California budgeted for unrealistic 8.25% returns, when the market was only delivering 7% returns.
- The Great Recession and the slow recovery substantially affected the return on investment to pension funds, too
- and key assumptions by state analysts about how long people would live (and thus require pension payments) as well as future costs of living were often flawed.
Collectively, U.S. states are under-funding the pension systems their retirees will depend on. As of 2018, they had saved just under $3 trillion, but need to put aside $1.2 trillion more, for a total of $4.2 trillion.
Given all of the fiscal uncertainty in states due to the fallout of COVID-19 – from exploding Medicaid and other health care spending to the collapse of state revenues – it is most likely that many states will again fail to make their full contribution to pensions over the next two years.
As a longtime observer of state government as the previous head of the National Governors Association, I believe that after COVID-19:
- there will be a restructuring of state governments to maximize the use of technology and substantially reduce the number of full-time workers…[which will] mean lower pension contributions by public employees and that means less money that can be used to pay current obligations and obligations into the near future.
- Finally, with interest rates at all-time lows and the stock market unlikely to make normal returns until the economy fully recovers in two to three years, the rate of return on investments will be much lower than commonly projected by pension analysts.
The combination of:
- the failure to contribute the state portion into pension funds,
- the reduced pension contributions from fewer full-time workers,
- and lower rates of return on investment over the next several years
will turn the pension problem into a fiscal crisis for states.
- States will be obligated to pay pensions, but won’t have the money to pay for them so that will require shifting state spending over to pensions – and away from schools and all the public services that state residents expect their tax dollars to pay for.
Editor’s Note: The original article by Raymond Scheppach, University of Virginia has been edited ([ ]) and abridged (…) above for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.
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Its a fallacy to think that government employees ‘contribute’ to their own pension plans. Where do you think their salaries come from? It only taxes that are funneled to either salaries or the ‘contribution’ portion of an employee pension. So that aspect makes no difference if there are less workers on the government payroll, all their costs come out of taxes.
As for the idea that politicians will cut back on services like education, I think not. They will simply raise taxes.
What this is going to lead to is a migration from the states with the highest and rising taxes to the ones with lower rates of increase. You can predict where these will be based on the included map and it will become more prevalent if the predicted rise of remote working increases, giving people more flexibility to move.