According to a recent Wall Street Journal article, state pensions across the country are in serious trouble. This is the culmination of a long process where politicians who were more concerned with short-term reelection goals have made promises in good times that simply cannot be kept. The increasing mathematical impossibility of many states meeting their obligations to state employees who were promised full retirements is at the point of boiling to a head.
The state of Illinois, for example, has experienced total state pension obligation growth since the 1980s of more than 1,000 percent. At the same time, the state’s economic output has only grown by about 200 percent. Illinois is trying to make up for the shortfall by raising money any way that it can, including raising property taxes in a state where they are already at national highs. But nothing can stop the inexorable march of negative compounding. Like so many other states with poorly conceived and mismanaged pension systems, Illinois is finding itself on the wrong side of the compounding equation. And this means that big cuts in benefits, insolvency or both are in the state’s future.
Another state with a woefully underfunded pension system is Kentucky. Currently, that state’s public employee pension fund is only about 16 percent funded. A recent decision in the state’s Supreme Court that disallowed any cut to benefits means that finding a solution before the state becomes completely insolvent is looking less likely by the day. And the consequences for those who rely on the state’s pension system for their livelihood could be dire.
For an example of the kinds of cuts that happen when public pension systems go belly up, it’s worth looking at the case of Central Falls, Rhode Island. The town of 20,000 people mismanaged its pension funds for decades. The end result was that the city was forced into bankruptcy. This ended up costing pensioners 55 percent of their benefits in immediate cuts alone. While the bankruptcy stabilized the city’s finances, the future of hundreds of city employees is still in limbo. There is a chance that even deeper cuts in the future will have to be made.
Many experts point to the likelihood of a federal bailout should a state’s pension fund get to the point where its pensioners are at risk of losing most or all of their livelihoods. However, as more and more states face insolvency, there will be inevitable sharp limits on how much the federal government can contribute to horribly mismanaged state finances.