Some Public Pensions May Soon Run Out of Money
We have expressed previously the belief that, sooner rather than later, states, cities and other public sector employers will be forced to migrate to 401k (or similar) defined contribution retirement systems. Private sector employers have made this shift over the last 25 years and now public sector employers are facing an onrush of issues that makes a similar transition in government virtually inevitable:
- accounting rule changes that will force governments to be more realistic about their pension plans and retiree health benefits
- disgruntled taxpayers bitter that public employees earn more and have better pensions and benefits than they do
- falling tax revenues
- rising retirement costs that are diverting huge sums of public money away from important public services
- high profile public pension abuses – both in public pension management and benefits
On top of all this, now comes an important academic study by Northwestern University finance professor Joshua Rauh showing that several large state pension plans can expect to be bone-dry out of money within a decade. In aggregate, state funds will run out of money in 2028:
Based on September 2009 asset values, if state pension fund asset returns have an average return of 8% going forward (the states’ typical assumption), states in aggregate will run out of funds in 2028. If average returns are 10% through 2045, the funds in aggregate will be roughly sufficient to cover liabilities to existing workers under the states’ actuarial assumptions. If average returns are only 6%, state funds in aggregate will run out in 2024. This analysis assumes that state inflation forecasts, which average 3%, are met. If inflation is greater holding the investment outcomes fixed, then even under the higher asset returns the funds will run out sooner, as many state systems provide inflation-linked cost of living adjustments (COLAs) to beneficiaries.
Illinois pensions are in the worst shape – expected to be broke in 2018. Next come Connecticut, New Jersey, and Indiana in 2019 followed by Hawaii, Louisiana and Oklahoma in 2020. A small number of state pensions (Florida, New York, Alaska, Nevada, and North Carolina) are in relatively good shape and are not expected to run out of money.
Once pension funds run dry, states will be forced to pay benefits (which in most cases are constitutionally guaranteed) on a pay-as-you-go basis. This means the full amount of the benefits will be paid from current tax revenue without the advantage of investment earnings. For many of the states, this could mean one-third or more of the state tax revenue would be devoted just to paying public employee pensions.
The information in following table summarizes the anticipated cashflow status of each state’s pension. 1
| State Pension Plan | Runs Out of Money In Year: | Annual Pay-as-you-Go Pension Benefits After Pension Funds Depleted ($ Billions) | Pay-as-you-Go Benefits as % of States Projected Tax Revenue |
|---|---|---|---|
| ILLINOIS | 2018 | 13.6 | 32% |
| CONNECTICUT | 2019 | 4.9 | 27% |
| INDIANA | 2019 | 3.6 | 17% |
| NEW JERSEY | 2019 | 14.4 | 34% |
| HAWAII | 2020 | 1.7 | 24% |
| LOUISIANA | 2020 | 4.3 | 27% |
| OKLAHOMA | 2020 | 3.7 | 30% |
| COLORADO | 2022 | 7.8 | 54% |
| KANSAS | 2022 | 2.5 | 23% |
| KENTUCKY | 2022 | 5.3 | 35% |
| NEW Hampshire | 2022 | 1.0 | 30% |
| ALABAMA | 2023 | 5.5 | 39% |
| MICHIGAN | 2023 | 7.8 | 20% |
| MINNESOTA | 2023 | 7.3 | 25% |
| MISSISSIPPI | 2023 | 3.9 | 37% |
| MARYLAND | 2024 | 6.0 | 24% |
| PENNSYLVANIA | 2024 | 13.8 | 27% |
| SOUTH CAROLINA | 2024 | 4.7 | 34% |
| WEST VIRGINIA | 2024 | 1.3 | 16% |
| MISSOURI | 2025 | 6.9 | 38% |
| MAINE | 2026 | 1.7 | 28% |
| MASSACHUSETTS | 2026 | 6.6 | 18% |
| NEW | 2026 | 3.9 | 40% |
| MONTANA | 2027 | 1.1 | 25% |
| RHODE ISLAND | 2027 | 2.4 | 50% |
| VERMONT | 2028 | 0.5 | 11% |
| ARIZONA | 2029 | 7.3 | 29% |
| ARKANSAS | 2030 | 3.1 | 21% |
| CALIFORNIA | 2030 | 68.1 | 30% |
| OHIO | 2030 | 28.0 | 55% |
| WYOMING | 2030 | 1.0 | 25% |
| SOUTH DAKOTA | 2031 | 1.0 | 38% |
| NEBRASKA | 2032 | 1.2 | 15% |
| VIRGINIA | 2033 | 8.6 | 22% |
| WASHINGTON | 2033 | 8.0 | 21% |
| DELAWARE | 2035 | 1.0 | 15% |
| IOWA | 2035 | 3.0 | 20% |
| TENNESSEE | 2035 | 4.2 | 16% |
| UTAH | 2036 | 3.5 | 26% |
| TEXAS | 2037 | 30.4 | 29% |
| WISCONSIN | 2038 | 9.7 | 27% |
| OREGON | 2039 | 6.0 | 33% |
| NORTH DAKOTA | 2041 | 0.5 | 9% |
| IDAHO | 2043 | 1.7 | 16% |
| GEORGIA | 2047 | 9.8 | 17% |
| ALASKA | No Runout | 8.4 | |
| FLORIDA | No Runout | 35.8 | |
| NEVADA | No Runout | 6.1 | |
| NEW YORK | No Runout | 65.4 | |
| NORTH CAROLINA | No Runout | 22.8 | |
| Mean | 2028 | 15.6 | |
| Median | 2026 | 9.3 | |
| Standard Deviation | 7.0 | 19.3 |
Notes:
- Data from Rauh, Joshua D., Are State Public Pensions Sustainable? Why the Federal Government Should Worry About State Pension Liabilities (May 15, 2010). Available at SSRN: http://ssrn.com/abstract=1596679 [↩]
