The Widening Gap Update

Jun 19, 2012

States continue to lose ground in their efforts to cover the long-term costs of their employees’ pensions and retiree health care, according to a new analysis by the Pew Center on the States, due to continued investment losses from the financial crisis of 2008 and states’ inability to set aside enough each year to adequately fund their retirement promises. States have responded with an unprecedented number of reforms that, with strong investment gains, may improve the funding situation they face going forward, but continued fiscal discipline and additional reforms will be needed to put states back on a firm footing.

In fiscal year 2010, the gap between states’ assets and their obligations for public sector retirement benefits was $1.38 trillion, up nearly 9 percent from fiscal year 2009. Of that figure, $757 billion was for pension promises, and $627 billion was for retiree health care. While there are many differences between states’ liabilities for pensions and retiree health benefits, both represent a sizable financial promise to workers and retirees for benefits they have earned that states will have to manage. Fiscal 2010 is the latest budget year for which complete numbers are available from all 50 states.

Though states have enough cash to cover retiree benefits in the short term, many of them—even with strong market returns—will not be able to keep up in the long term without some combination of higher contributions from taxpayers and employees, deep benefit cuts, and, in some cases, changes in how retirement plans are structured and benefits are distributed. Many states have begun to take action on this problem—nearly every state has reduced pension benefits or increased employee contributions in the last three years, but in many cases these have been relatively minor changes. Some states, such as Colorado, have gone for deeper cuts to their traditional pension plans; while a handful of states have concluded that the reforms already made will not be sufficient to control rising long-term retirement costs and reduce the risk of future underfunding, and that the best alternative is switching to a new pension system, such as the redesigned pension plan that Rhode Island introduced in November 2011.

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