States Face 1.26 Trillion Retirement Benefit Shortfall

From: YID With LID

The Unions can bitch and protest all they want but it will not change the facts, state budgets are facing an increasingly large gap between what they owe in retirement benefits and what they can pay and unless something is done about it today these states will be heading toward bankruptcy and no one will get paid.

Pew Research released a study that should strike fear in the hearts of most state governments. The study reports that the pension and health-care funding gap now stands at $1.26 trillion dollars, which is up 26 percent over the previous year. Whats worse is that $1.26 trillion may be an understatement:

The $1.26 trillion figure is based on states’ own actuarial assumptions. Most states use an 8 percent discount rate—the investment target that states expect to earn, on average, in future years. But there is significant debate among policy makers and experts about what discount rate is most appropriate for states to use when valuing pension liabilities. This is an important issue because, depending on how those liabilities are calculated, states’ total funding shortfall for their long-term pension obligations to public sector retirees could be as much as $1.8 trillion (using assumptions similar to corporate pensions) or $2.4 trillion (using a discount rate based on a 30-year Treasury bond).

The federal guidelines are that states obligations should be funded up to a level of 80%. Unfortunately the average state retirement benefits are funded up to 78%. Its even worse on an individual state level, 18 state's pension obligations are funded at less than 70%.

Given these and other obligations, states must take steps to address these rising costs, not only for the present shortfalls but they need to change their laws so these issues do not reoccur.

Unions have been claiming that Wisconsin was trying to break the unions. What this pension data shows is that it is the Unions who will be breaking the states.

Labor Union Report has a state by state calculation of the shortfall--click here to give it a read.