US States' pension funds short by $1 trillion in 2008

States underfunded their pension plans and retiree health benefits by $1 trillion in 2008, a new report says.

The report, released Thursday by the Pew Center on the States, says 21 states had less than 80% of the money they needed to pay for future retiree pensions. In 2006, that was true of 19 states.

States that don’t address their legal obligations to pay future pensions and retiree health benefits for their public employees may have to raise taxes, says Susan Urahn, managing director of the Pew study.

“States have built up a substantial balance that becomes harder to pay down the road,” Urahn says.

Illinois had 54% of the future pension money it needed, the lowest percentage among states. Other troubled states included Oklahoma (60.7%), Rhode Island (61.1%), Connecticut (61.6%), Kentucky (63.8%) and Hawaii (68.8%).

The report also says only two states —Alaska and Arizona— have pre-funded more than 50% of their obligations to pay retiree health benefits. Twenty states address retiree health benefits on a pay-as-you-go basis instead of setting up trust funds.

Since 2006, the Governmental Accounting Standards Board has required states to estimate their future liability for retiree health benefits. In 2008, states’ collective liability totaled $587 billion, with only 5.4% pre-funded by a small number of states.

How big is the annual cost of pensions and retirement health benefits for public employees at the state level? According to Pew, it’s more than states spent on higher education: $108 billion vs. $102 billion spent for colleges and universities.

Fifteen states enacted reforms last year to address future retiree expenses.

Some merely began making bigger payments to their pension funds, but six — Kentucky, Nevada, New Jersey, New York, Rhode Island and Texas — took steps to cap the future growth of benefits.

Unlike the private sector, where employer-provided pensions are increasingly rare and the normal age for full benefits is 65, public employees with office jobs in many states are eligible for full pensions much earlier.

Beginning this year, new hires in Nevada won’t be eligible for full pensions until age 62, up from 60. And the formula used for calculating the pension will be less generous.

A new pension plan approved by the New York Legislature late last year postpones full retirement benefits for most new hires from age 55 to age 62 after 30 years of service. For new teachers, it will kick in at age 57 after 30 years on the job.

Changing the retirement age can result in big savings, according to Pew. In Minnesota, where the retirement age for new hires was increased from 65 to 66 in 1989, the state saved $650 million over the ensuing 20 years.

Michigan and Alaska, meanwhile, have shifted from traditional pension plans to 401(k)-style plans. Michigan made the change in 1997. The new plan now covers about half of state employees.

Pew also reports some states are requiring employees to help pay for retiree health benefits. In New Hampshire, state employees who retire before age 65 must pay a $65 monthly premium.

“With most 2010 legislative sessions underway, the encouraging news is that many state officials grasp the depth of the funding challenges for their public sector retirement benefit systems and they need to respond,” study authors said.

Source: USA Today

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