One of the biggest festering problems in American politics in recent years has been the long-term struggles of states to maintain the fiscal solvency of their publicly-funded pension programs. That problem was able to take a backseat during the pandemic, especially when markets were bullish. But now that that trend has been reversed and public pension investments are struggling along with the rest of the stock market, the underlying crisis is only becoming worse.
Unfunded pension liabilities represent commitments that states have made to public employees. Since they are not due immediately, states often defer figuring out how to pay for them to future generations and legislators. Just as the average American knows that they need to start putting funds in a 401(k) or other retirement savings plan long before they begin withdrawing from it, states know they can’t wait until the bill is due to start figuring out how to pay for it.
Unfortunately, that’s often what they do anyway. A recent report by the Reason Foundation finds that total unfunded state pension liabilities are set to rise back above $1 trillion this year, assuming a negative annual growth rate for the 2022 fiscal year that ended June 30. With early projections anticipating a negative 6 percent growth rate for the fiscal year, unfunded state pension liabilities will jump from $783 billion last year to $1.3 trillion.
According to the Reason Foundation’s numbers, just seven states are set to have 90 percent or more of their pension liabilities funded given a negative 6 percent return on their pension funds. Meanwhile, twenty states are set to have a funding ratio below 70 percent. The worst of these are Connecticut, Kentucky, and New Jersey, each set to fund less than half of their pension liabilities.
And it’s not just pensions that states are struggling to figure out how to pay for. States also face a second crisis of unfunded liabilities in the form of retiree health care benefits for state employees. A recent report by the American Legislative Exchange Council found that state Other Post-Employment Benefits (OPEB) liabilities added up to just under $1 trillion, with an average funding ratio of just 12 percent.
The growing costs of pension plans and OPEB benefits at the state level are mirrored at the federal level, where spending on Social Security and major health insurance programs (including Medicare and Medicaid) are set to rise from a total of 10.8 percent of GDP this year to 14.9 percent of GDP thirty years from now. For context, the difference between 10.8 percent of GDP and 14.9 percent of GDP this year is about $930 billion.
It’s worse than just a parallel, however, as the bills will start to come due at around the same times. That means that as states are trying to figure out how to pay for the pensions and OPEB benefits they put off for years, so too will the federal government. When that happens, states and the federal government will each be looking at taxpayers to bail them out for their irresponsibility.
But taxpayers shouldn’t wait for that to happen. Rather than accepting that ballooning retirement costs are tomorrow’s problem, they should demand real reform from their lawmakers at every level of government. After all, if taxpayers don’t demand that legislators solve the problem now, legislators will be the ones demanding that taxpayers fix it later on.
Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government.