Most people know our $13 trillion national debt is endangering America’s credit rating and pushing the United States closer to bankruptcy. But hidden beneath the surface is another ticking time bomb that threatens economic collapse in cities and states across the country: unfunded public employee pensions.
Historically, increasing public employee pensions has been a practical way to resolve a budget crisis. For many elected officials, voting to approve richer pensions is easy because they know they’ll be long gone before the bill comes due. But now, workers are retiring earlier and living longer, leading to the same fiscal train wreck that has Social Security teetering on the brink of bankruptcy.
Lawmakers are supposed to set aside money each year to fund public pensions, but they often divert that money to other programs. In the meantime, the unfunded pension liability grows – silently, inexorably shackling future generations to suffocating debt.
In the past, private companies fell into the same trap, but as of next year, private employers will be required to fund 100 percent of their pension obligations. Lawmakers did not apply the same rules to themselves. Their reason? Unlike private companies, government cannot go bankrupt because it can always get more money from taxpayers through higher taxes.
According to an analysis by the Pew Center on the States, state and local governments now owe at least $1 trillion to public employee pension accounts. To pay that debt, taxpayers would have to spend $1 million a day for the next 2,740 years. That works out to about $8,800 for each American household, on top of their estimated $120,000 share of our national debt.
How did this happen?
Simply put, state lawmakers didn’t make the required payments to their pension plans. According to the Washington Post, “They failed to squirrel away enough money to pay retiree health benefits and, perhaps most egregious, they increased their benefits without figuring out how to pay for them.” A separate report by Wilshire Consulting on 125 state plans found that in 2008 elected officials paid only 65 percent of what they owed to state pensions.
Pew’s $1 trillion figure – tallied through the end of the 2008 fiscal year – is conservative given that it doesn’t capture the stock market losses incurred in the second half of that year. To make matters worse, the study did not include many city, county and municipal pension plans, which are thought to have similar funding shortfalls.
What about Washington state? According to Pew, state lawmakers have failed to make the total required pension contributions since 2001. In fact, between 1999 and 2008, Washington’s pension liabilities outpaced assets almost two to one. And those figures don’t account for state investment losses due to the recession.
Pew says our state officials must improve how they manage our long-term liabilities for both pensions and retiree health care and other benefits.
How can they do that?
To help close the gap, others states are scaling back their retirement plans. According to Pew, 10 states have curbed benefits to new workers or raised the retirement age. Nevada, for instance, lowered pension benefits for those hired after Jan. 1. It also raised the retirement age for public workers from 60 to 62, starting this year. Another 10 states – including Iowa, Nebraska and New Mexico – boosted employee contributions.
Workers are also contributing more to their retirement health-care plans. For instance, new state workers in Kentucky must now put 1 percent more of their paychecks toward their retiree health plans.
But public employee unions in Washington state are fighting benefit cuts and additional contributions.
As Gov. Chris Gregoire starts contract negotiations with the state employee unions and as state legislators hit the campaign trail, they need to face up to the fact that failure to fully fund public employee pensions has created a ticking time bomb which gets larger by the day.
And as those legislators campaign, voters should ask them a simple question: “Why are you mortgaging our children’s future?”
Don Brunell is the president of the Association of Washington Business.