States Short 27% of $2.7 Trillion Owed Retirees, Pew Study Says
By Adam L. Cataldo
Dec. 18 (Bloomberg) — U.S. states are short almost 27 percent of the estimated $2.73 trillion in pension and benefit payments owed to retired workers over the next 30 years.
States, on the hook for an estimated $2.35 trillion in pension payments and $381 billion for retiree benefits including health care, are underfunded by $731 billion, the Pew Center on the States said in a report released today. While states have set aside $2 trillion for pension payments, only $11 billion is available for benefits.
“It is really a situation where states have been making promises that they have to pay for tomorrow and not putting the money aside today,” Susan Urahn, the center’s managing director, said in an interview. The center, a part of the Pew Charitable Trusts, reviews state policies and works to promote nonpartisan solutions, according to information on its Web site.
The report attempts to estimate the costs of anticipated benefits and consequences states will face if action isn’t taken. States are among government entities with annual revenue of at least $100 million that must provide estimates of their non-pension retiree benefit costs in their 2008 financial reports. The reporting requirements were established by the Government Accounting Standards Board in 2004.
“To their credit, states have socked away enough to cover about 85 percent of the pension bill,” according to the report, called “Promises with a Price.” “But there is very little put aside for non-pension benefits.”
The number of people 65 and older is projected to increase by 80 percent between 2010 and 2030, the report said, citing figures from the Social Security Administration. By 2030, about 71 million, or one out of every five people, will be over 65.
National Funding Rate
Nationally, 30 state pension systems are 80 percent or more funded, including Oregon and North Carolina, with almost half of those more than 90 percent funded, the report said. There are 20 states with funding levels below 80 percent, including West Virginia, New Jersey, Kentucky and Louisiana. For them, the “proportion of assets to liabilities may create fiscal stress if unaddressed,” the report said.
Rising health-care costs are contributing to the funding problem, Urahn said. New Jersey’s retiree health costs rose 355 percent during a recent five-year period, the report said. In 2005, the state spent $911 million, up from $200 million in 2000.
States paid out about $9.7 billion in benefits to retirees last year, the report said. They included life insurance and dental coverage.
The five largest U.S. states — California, Texas, New York, Florida and Illinois — haven’t set aside any money to pay for future non-pension benefits, the report said. California owes an estimated $48 billion and New York is projected to owe $50 billion. Connecticut and New Jersey need an estimated $22 billion each to meet their obligations.
Non-Pension Costs
Four states have put aside at least $1 billion to fund such benefits. Ohio leads that group with $11.1 billion, followed by Alaska with $2.2 billion. Only six states, including Ohio, will have fully funded their non-pension obligations in the next 30 years, the report said.
Setting aside money and making annual funding contributions will save states money over pay-as-you-go strategies, the report said. California could cut its health-care liability 35 percent to $31.3 billion with such a payment plan.
States can also close the gap by altering terms of their benefit plans, the report said. In 2005, Pennsylvania began charging workers 1 percent of their last year’s pay for retirement health care. In 2008, an employee will need 20 years service, up from 15 years, for lifetime health benefits.
To contact the reporter on this story: Adam L. Cataldo in New York at acataldo@bloomberg.net .
