Funding Gap Widens for State Pensions

June 19, 2012 ( - The shortfall in funding states’ retirement systems has grown to at least $1.38 trillion, according to a report from Pew Center on the States.

The report, “The Widening Gap Update,” found that state pension plans represented more than half of this shortfall, with $2.31 trillion set aside to cover $3.07 trillion in long-term liabilities—leaving about a $757 billion gap. Retiree health care and other non-pension benefits accounted for the remaining $627 billion. States had $660 billion in non-pension liabilities but saved just $33.1 billion to pay for them—which is slightly less than 5% of the total cost.

During a webinar about the research, David Draine, senior researcher at Pew, said 34 states had less than 80% of their pension promises funded in 2010, up from 31 states in 2009 and just 22 in 2008. A healthy pension plan should be at least 80% funded, he added.

“The larger [funding gaps] are, the higher the cost for taxpayers today and for many years to come,” Draine said, noting that the growing funding gap competes with other expenses like education.

Connecticut, Illinois, Kentucky and Rhode Island were the worst among the states, all under 55% funded in 2010. North Carolina, South Dakota, Washington and Wisconsin were funded at 95% or better. These numbers from 2010 do not reflect reforms made since, such as in Rhode Island.

States also continue to fall behind in their efforts to cover the long-term costs of their retirees’ health care and other non-pension benefits, such as life insurance. Seventeen states had no money set aside, and only seven states had funded at least 25% of this long-term liability. In contrast, Arizona and Alaska had nearly 50% of their health care liabilities covered by assets on hand. No other states came close to that percentage, according to the report.

While the Great Recession had a negative impact on state pension and retiree health care costs, Draine argued that the problem began before the financial crisis. Before the downturn, many states drove up their pension liabilities by increasing employee benefits early in the decade, either without considering the price tag or assuming the market gains would cover the cost, according to the report.

Many states have been “kicking the can down the road” and adding to the problem by not contributing in good times, Draine said.

To manage long-term pension obligations, nearly every state has moved to reduce its retirement bill in the last three years. Between 2009 and 2011, 43 states enacted benefit cuts, increased employee contributions, or did both, according to the National Conference of State Legislatures.

The trend continued in 2012 with several states adopting major reforms. The most common actions for reform have included asking employees to contribute more toward their pension benefits; increasing the age and years of service required before retiring; limiting the annual cost-of-living increase; and changing the formula used to calculate benefits to provide a smaller pension check.

“The Widening Gap Update” is available here.