The Pension Bomb
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Just as you probably haven’t socked away enough to retire yet—especially after 2008’s market losses—your state government has fallen behind, too. Way behind. As of the beginning of 2010, Connecticut has put aside only 52 percent of what it will need to pay pension benefits for its 53,000 eligible state employees on the job today and the nearly 40,000 retirees already drawing pensions. That’s about $9 billion short. The big difference beween your retirement and that of state employees is that no one is going to help you make up your retirement shortfall, but you—or your children perhaps—will have to pony up when the state’s pension fund runs dry. This looming deficit is what one economist calls a “sleeper tax” that will awaken sometime in the future. Or you might think of it as a fiscal bomb that is set to explode unless some politically unpopular steps are taken soon.
In addition, there’s a health-benefits bomb to consider. Taxpayers are called upon to pick up the health-care costs of state employees, too—as well as those of their dependents, including Medicare premiums once a retiree becomes eligible. Further, retirees can opt for slightly reduced pension payments to ensure that after they die, their spouses will receive half the pension and health-care coverage until they themselves die.
Most state and municipal governments currently are not required to set aside money for retiree health costs, or even account for them (though the state recently established a retiree health-care fund for new hires and those with fewer than five years of service). Health-care costs for retirees come out of annual operating budgets, lumped together with those still on the payroll. That amount in Connecticut currently comes to about $1.7 billion annually, a figure expected to grow rapidly in the years ahead. Taxpayers are liable for those accumulating costs, too, a long-term liability that the General Assembly’s Office of Fiscal Analysis estimates at $21.7 billion.
Add it up, and every man, woman and child in the state of Connecticut is on the hook for about $8,700 to cover unfunded state employee pensions and post-employment health care. When you add in similar shortfalls for teachers’ retirement and health-care benefits, and for the thousands of municipal employees toiling for our 169 cities and towns, the per capita amount owed grows to $16,000. And of course, let’s not forget the additional $5,100 we each owe on the state’s $18 billion debt.
We are not alone. Many government-sponsored pension funds across the country are feeling the pain of tough economic times right now. But we are in worse shape than most. According to a Moody’s Investor Services outlook issued in October that downgraded the state’s credit rating, Connecticut’s pension funding levels were among the lowest in the country in 2008, even before the market turmoil was taken into consideration, while the state’s post-employment benefit liabilities were actually larger than the size of the state’s annual operating budget. The report also noted that if the state were to fully and properly fund its annual required contributions for the health-care liability, it would have to double what it puts aside to nearly $3.5 billion, adding about $1.7 billion to an annual budget that is already seriously bleeding red ink.
The national average funding level for government-sponsored pensions is about 83 percent, even after market losses, compared to Connecticut’s 52 percent for state employees. Most studies suggest that an 80 percent ratio is a sound standard for state and local government pension funds. Anything lower than that is likely to require a combination of further funding through taxes or taking on additional long-term debt, reduced benefits or other spending, or increased employee contributions. Regardless, most solutions require shifting current obligations to future generations of taxpayers.
The silver lining is that the bill for state employee pensions and retiree health care won’t come due all at once. There is money in the fund, about $10 billion, to pay current and future retirees for some years to come. Future investment gains could also help reduce the shortfall. Still, long-term solutions are needed now, and any solution is going to cost money—a lot of money.