Press release:

Pew Study Finds States Face $1 Trillion Shortfall in Retiree Benefits

Issued by:Pew Charitable Trusts

Date: Thursday, February 18, 2010

Washington, D.C. - 02/18/2010 - There was a $1 trillion gap at the end of fiscal year 2008 between the $2.35 trillion states had set aside to pay for employees' retirement benefits and the $3.35 trillion price tag of those promises, according to a new report released by the Pew Center on the States.  The shortfall, which will have to be paid over the next 30 years by state and local governments, amounts to more than $8,800 for every household in the United States.

The figures detailed in Pew's report, gThe Trillion Dollar Gap,h include pension, health care and other non-pension benefits promised to both current and future retirees in statesf and participating localitiesf public sector retirement systems.

Pewfs numbers likely underestimate the bill coming due because the most recent available data do not account for the second half of 2008, when statesf pension fund investments were particularly affected by the financial crisis.  Additionally, most statesf accounting methods spread the investment declines over a period of time–meaning states will be dealing with their losses for several years.

gWhile the economic crisis and drop in investments helped create it, the trillion dollar gap is primarily the result of statesf inability to save for the future and manage the costs of their public sector retirement benefits,h said Susan Urahn, managing director, Pew Center on the States.  gThe growing bill coming due to states could have significant consequences for taxpayers—higher taxes, less money for public services and lower state bond ratings.  States need to start exploring reforms.h

To help policy makers and the public understand these challenges, Pew assessed all 50 states on how well they are managing their public sector retirement benefit obligations.

In fiscal year 2008, statesf pension plans had $2.8 trillion in long-term liabilities, with more than $2.3 trillion reserved to cover those costs.  Overall, statesf pension systems were 84 percent funded—above the 80 percent funding level recommended by experts.  Still, the unfunded portion–$452 billion–is substantial, and statesf performance is down slightly from an 85 percent combined funding level in fiscal year 2006.  Pension liabilities have grown by $323 billion since 2006, outpacing asset growth by almost $87 billion.

Retiree health care and other non-pension benefits, such as life insurance, create another huge bill coming due: a $587 billion total liability to pay for current and future benefits, with only $32 billion–or just over 5 percent of the cost–funded as of fiscal year 2008.  Half of the states account for 95 percent of the liability.  Because of a 2004 Governmental Accounting Standards Board rule, the full range of non-pension liabilities was officially reported in fiscal year 2008 for the first time across all 50 states.

In spite of the large and growing shortfall and the variation among states, momentum for policy reform is building nationwide.  Fifteen states passed legislation to reform their state-run retirement systems in 2009 compared to 12 in 2008 and 11 in 2007.  Reforms largely fell into five categories: (1) keeping up with funding requirements; (2) reducing benefits or increasing the retirement age; (3) sharing the risk with employees; (4) increasing employee contributions; and (5) improving governance and investment oversight.

With legal restrictions in most states on reducing pensions for current employees, the majority of changes in the past two years affect new employees.  Ten states increased the contributions that current and future employees make to their own benefit systems, while ten states lowered benefits for new employees or set in place higher retirement ages or longer service requirements.

gA growing number of policy makers recognize that their statesf fiscal health depends on how well they manage the bill coming due for public sector retirement benefits,h said Urahn.  gWe are seeing more and more states explore policy reforms aimed at putting their systems on stronger fiscal footing.h

gThe Trillion Dollar Gaph identified significant variations in how states are managing their employee retiree benefits:

Pension benefits


Health care and other non-pension benefits
About the Methodology

Pewfs analysis is based on data from statesf own Comprehensive Annual Financial Reports, pension plan system annual reports and actuarial valuations.  Pew researchers analyzed the funding performance of 231 state-administered pension plans and 159 state-administered retiree health care and other non-pension benefit plans, which include some localitiesf and teacher plans.  States have flexibility in how they compute their obligations and present their data, so three main challenges arise in comparing their numbers: whether and how they smooth investment gains or losses; when they conduct actuarial valuations; and what assumptions they use for investment returns, retirement ages and other factors.

The Pew Center on the States is a division of The Pew Charitable Trusts that identifies and advances effective solutions to critical issues facing states.  Pew is a nonprofit organization that applies a rigorous, analytical approach to improve public policy, inform the public and stimulate civic life.