May 6th, 2011
Econintersect: The Congressional Budget Office (CBO) calculates that it is likely state and local pension plans are underfunded from $2 to $3 trillion dollars. The exact number is difficult to determine because of the differing methods of calculating assets and liabilities. However, the study concludes:
By any measure, nearly all state and local pension plans are underfunded, which means that the value of the plans’ assets is less than their accrued pension liabilities for current workers and retirees. Follow up:
Key points in the study:
- Underfunding can be reduced either by decreasing pension plans’ liabilities or by increasing their assets.
- Reducing liabilities essentially means lowering the present value of lifetime benefits (though not by just raising the discount rate).
- Increasing plans’ assets requires raising contributions from current workers, raising government contributions, or earning more on investments.
- Although the amount of underfunding of state and local pensions is substantial, it is not necessarily in the best interests of taxpayers for states and localities to completely prefund their pension liabilities. Ultimately, judgments about the amount and timing of additional funding that should be provided for underfunded plans depend on many factors, including competing budget priorities, views about intergenerational fairness, and the amount of risk the sponsors are prepared to take that they (and their taxpayers) might have to bear substantial costs at some point in the future in order to pay promised benefits. It is generally agreed that the costs—including pension costs—of current services provided by state and local governments should be borne by those who benefit from those services and not shifted to future generations of taxpayers, as has already occurred because of underfunding by previous taxpayers.