Got a Great Public Sector Pension or State Retiree Health Benefits? Now Watch Your Children and Grandchildren Suffer...

Summary: Too many lofty promises were made to workers of older generations, and too little (or nothing) was contributed by workers for their mathematically-flawed pension schemes and now we are dealing with the fallout. Changes are happening to reduce the gigantic funding holes, but the most pain will be felt by younger workers. Older workers, you should thank irresponsible policy-makers, your unions, and now, your children, grandchildren, and great-grandchildren for their generosity for paying for your what is "owed" to you.

The Pew Center on the States (June 2012):

States continue to lose ground in their efforts to cover the long-term costs of their employees’ pensions and retiree health care, due to continued investment losses from the financial crisis of 2008 and states’ inability to set aside enough each year to adequately fund their retirement promises. States have responded with an unprecedented number of reforms that, with strong investment gains, may improve the funding situation they face going forward, but continued fiscal discipline and additional reforms will be needed to put states back on a firm footing.

Though states have enough cash to cover retiree benefits in the short term, many of them—even with strong market returns—will not be able to keep up in the long term without some combination of higher contributions from taxpayers and employees, deep benefit cuts, and, in some cases, changes in how retirement plans are structured and benefits are distributed. 

Many experts say that a healthy pension system should be at least 80 percent funded.

States have not done nearly enough to set aside money for their retirees’ health care and other non-pension benefits such as life insurance. As of fiscal year 2010, they had put away only 5 percent of their total bill coming due for those benefits.

States’ public sector retirement funding gap for both pensions and retiree health benefits grew by $120 billion, from $1.26 trillion to $1.38 trillion, from fiscal year 2009 to 2010. The largest part of that year-over-year growth was the increase in pension liabilities ($126 billion), which outpaced the growth in pension assets ($29 billion). The total public pension liability in 2010 was about $3.07 trillion; assets were $2.31 trillion, leaving a $757 billion gap.

Retiree health care and other benefits liability in 2010 was $660 billion; states had assets to pay $33.1 billion, leaving a $627 billion hole.

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 or increased employee contributions, or did both.

The most common actions included asking employees to contribute a larger amount toward their pension benefits; increasing the age and years of service required before retiring; limiting the annual cost-of-living (COLA) increase; and changing the formula used to calculate benefits to provide a smaller pension check. States also have cracked down on abuses, such as the practice of “spiking” final pay to get a larger pension check by including overtime pay and sick leave. 

The reforms that states have enacted in the last three years mostly affect future state workers, as it is legally difficult to reduce benefits for current employees and retirees.

Source: http://www.pewstates.org/uploadedFiles/PCS_Assets/2012/Pew_Pensions_Update.pdf
Source: http://www.zerohedge.com/news/us-retirement-benefits-underfunding-rises-record-14-trillion